I

105TH CONGRESS

1ST SESSION H. R. 53

To amend the Internal Revenue Code of 1986 to establish a Higher Education

Accumulation Program (HEAP) under which individuals are allowed

a deduction for contributions to HEAP accounts.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 7, 1997

Ms. ESHOO (for herself, Mr. ROTHMAN, Mr. FARR of California, Mr.

UNDERWOOD, Mr. HASTINGS of Florida, Mr. KENNEDY of Rhode Island,

Mr. FROST, Ms. NORTON, Mr. MENENDEZ, Ms. JACKSON-LEE of Texas,

and Mr. GREEN) 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 establish

a Higher Education Accumulation Program (HEAP)

under which individuals are allowed a deduction for contributions to HEAP 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. SHORT TITLE.

4 This Act may be cited as the ‘‘Higher Education Ac5 cumulation Program Act of 1997’’.
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1 SEC. 2. DEDUCTION FOR CONTRIBUTIONS TO HEAP AC2 COUNTS.

3 (a) IN GENERAL.—Part VII of subchapter B of chap4 ter 1 of the Internal Revenue Code of 1986 (relating to

5 additional itemized deductions for individuals) is amended

6 by redesignating section 221 as section 222 and by insert7 ing after section 220 the following new section:

8 ‘‘SEC. 221. HIGHER EDUCATION ACCUMULATION PROGRAM

9 (HEAP) ACCOUNTS.

10 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi11 vidual, there shall be allowed as a deduction an amount

12 equal to the amount paid in cash for the taxable year by

13 the taxpayer to a HEAP account established for the pur14 pose of accumulating funds to pay the educational ex15 penses of any child of the taxpayer.

16 ‘‘(b) LIMITATIONS.—

17 ‘‘(1) MAXIMUM DEDUCTION.—The amount al18 lowable as a deduction under subsection (a) to the

19 taxpayer for any taxable year shall not exceed

20 $5,000 ($2,500 in the case of a married individual

21 filing a separate return) for amounts paid for the

22 benefit of each child of the taxpayer. In no event

23 shall the amount allowable as a deduction under

24 subsection (a) to the taxpayer for any taxable year

25 exceed $15,000 ($7,500 in the case of a married in26 dividual filing a separate return).
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1 ‘‘(2) DEDUCTION MAY NOT EXCEED COMPENSA2 TION.—The amount allowable as a deduction under

3 subsection (a) shall not exceed the amount of com4 pensation (as defined in section 219(f)) includible in

5 the taxpayer’s gross income for the taxable year.

6 ‘‘(3) ACCOUNT MAY NOT BE ESTABLISHED FOR

7 BENEFIT OF MORE THAN 1 INDIVIDUAL.—A HEAP

8 account may not be established for the benefit of

9 more than 1 individual.

10 ‘‘(4) NO DEDUCTION AFTER BENEFICIARY AT11 TAINS AGE 18.—No deduction shall be allowed for

12 any payment to a HEAP account established for the

13 benefit of an individual who has attained age 18 be14 fore the close of the calendar year in which such

15 payment is made.

16 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur17 poses of this section—

18 ‘‘(1) HEAP ACCOUNT.—The term ‘HEAP ac19 count’ means a trust created or organized in the

20 United States exclusively for the purpose of paying

21 the educational expenses of a child of the taxpayer,

22 but only if the written governing instrument creating

23 the trust meets the following requirements:

24 ‘‘(A) No contribution will be accepted un25 less it is in cash, and contributions will not be
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1 accepted for the taxable year in excess of

2 $5,000.

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

4 section 408(n)) or another person who dem5 onstrates to the satisfaction of the Secretary

6 that the manner in which that person will ad7 minister the trust will be consistent with the re8 quirements of this section.

9 ‘‘(C) No part of the trust assets will be in10 vested in life insurance contracts.

11 ‘‘(D) The assets of the trust shall not be

12 commingled with other property except in a

13 common trust fund or common investment

14 fund.

15 ‘‘(E) On the termination date—

16 ‘‘(i) the balance in the account shall

17 be distributed to the individual for whose

18 benefit the account is established, or

19 ‘‘(ii) at the election of such individual,

20 such account shall be treated for purposes

21 of this title as an individual retirement ac22 count.

23 ‘‘(2) CHILD.—The term ‘child’ has the meaning

24 given such term by section 151(c)(3).
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1 ‘‘(3) TERMINATION DATE.—The term ‘termi2 nation date’ means—

3 ‘‘(A) the date the beneficiary attains age

4 25,

5 ‘‘(B) if the beneficiary is at least a half6 time student on the date referred to in subpara7 graph (A), the last day of the last school year

8 for which the beneficiary is at least a half-time

9 student, or

10 ‘‘(C) the date of the beneficiary’s death.

11 ‘‘(4) EDUCATIONAL EXPENSES.—The term

12 ‘educational expenses’ means—

13 ‘‘(A) tuition and fees required for the en14 rollment or attendance of a student at an eligi15 ble educational institution,

16 ‘‘(B) fees, books, supplies, and equipment

17 required for courses of instruction at an eligible

18 educational institution, and

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

20 lodging while attending an eligible educational

21 institution.

22 ‘‘(5) ELIGIBLE EDUCATIONAL INSTITUTION.—

23 The term ‘eligible educational institution’ means—

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

25 ‘‘(B) a vocational school.
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1 ‘‘(6) INSTITUTION OF HIGHER EDUCATION.—

2 The term ‘institution of higher education’ means the

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

4 of the Higher Education Act of 1965.

5 ‘‘(7) VOCATIONAL SCHOOL.—The term ‘voca6 tional school’ means an area vocational education

7 school as defined in subparagraph (C) or (D) of sec8 tion 521(4) of the Carl D. Perkins Vocational and

9 Applied Technology Education Act to the extent

10 such school is located within any State (as defined

11 in such section).

12 ‘‘(8) TIME WHEN CONTRIBUTIONS DEEMED

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

14 contribution on the last day of the preceding taxable

15 year if the contribution is made on account of such

16 taxable year and is made not later than the time

17 prescribed by law for filing the return for such tax18 able year (including extensions thereof).

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

20 ‘‘(1) IN GENERAL.—Except as otherwise pro21 vided in this subsection, any amount paid from a

22 HEAP account shall be included in the gross income

23 of the beneficiary of such account for the taxable

24 year in which the payment is received.
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1 ‘‘(2) AMOUNTS USED FOR EDUCATION EX2 PENSES.—If any payment from a HEAP account is

3 used to pay the educational expenses of the bene4 ficiary of such account—

5 ‘‘(A) paragraph (1) shall not apply, but

‘‘(B) 1 6 ⁄10th of such amount shall be in7 cluded in gross income of the beneficiary of

8 such account for the taxable year in which the

9 payment is received and for each of the 9 tax10 able years thereafter.

11 ‘‘(3) EXCESS CONTRIBUTIONS RETURNED BE12 FORE DUE DATE OF RETURN.—Paragraph (1) shall

13 not apply to the distribution of any contribution

14 made during a taxable year to a HEAP account to

15 the extent that such contribution exceeds the

16 amount allowable as a deduction under subsection

17 (a) if—

18 ‘‘(A) such distribution is received on or be19 fore the day prescribed by law (including exten20 sions of time) for filing such individual’s return

21 for such taxable year,

22 ‘‘(B) no deduction is allowed under sub23 section (a) with respect to such excess contribu24 tion, and
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1 ‘‘(C) such distribution is accompanied by

2 the amount of net income attributable to such

3 excess contribution.

4 Any net income described in subparagraph (C) shall

5 be included in the gross income of the individual for

6 the taxable year in which such excess contribution

7 was made.

8 ‘‘(4) TREATMENT AS INDIVIDUAL RETIREMENT

9 PLAN NOT SUBJECT TO INCOME TAX INCLUSION.—

10 The treatment described in subsection (c)(1)(E)(ii)

11 shall not be treated as a distribution for purposes of

12 this subsection.

13 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—

14 ‘‘(1) EXEMPTION FROM TAX.—A HEAP ac15 count is exempt from taxation under this subtitle

16 unless such account has ceased to be a HEAP ac17 count by reason of paragraph (2) or (3). Notwith18 standing the preceding sentence, any such account is

19 subject to the taxes imposed by section 511 (relating

20 to imposition of tax on unrelated business income of

21 charitable, etc. organizations).

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

23 INDIVIDUAL ENGAGES IN PROHIBITED TRANS24 ACTION.—
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1 ‘‘(A) IN GENERAL.—If the individual for

2 whose benefit a HEAP account is established or

3 any individual who contributes to such account

4 engages in any transaction prohibited by section

5 4975 with respect to the account, the account

6 shall cease to be a HEAP account as of the

7 first day of the taxable year (of the individual

8 so engaging in such transaction) during which

9 such transaction occurs.

10 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

11 ALL ITS ASSETS.—In any case in which any ac12 count ceases to be a HEAP account by reason

13 of subparagraph (A) as of the first day of any

14 taxable year, paragraph (1) of subsection (d)

15 shall apply as if there was a distribution on

16 such first day in an amount equal to the fair

17 market value (on such first day) of all assets in

18 the account (on such first day).

19 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU20 RITY.—If, during any taxable year, the individual for

21 whose benefit a HEAP account is established, or any

22 individual who contributes to such account, uses the

23 account or any portion thereof as security for a loan,

24 the portion so used shall be treated as distributed to

25 the individual so using such portion.
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1 ‘‘(f) ADDITIONAL TAX ON CERTAIN DISTRIBU2 TIONS.—

3 ‘‘(1) DISTRIBUTION NOT USED FOR EDU4 CATIONAL EXPENSES.—If any payment from a

5 HEAP account is used for any purpose other than

6 the payment of the education expenses of the bene7 ficiary of such account, the tax liability under this

8 chapter of such beneficiary for the taxable year in

9 which the payment is received shall be increased by

10 an amount equal to 10 percent of such payment.

11 ‘‘(2) DISTRIBUTIONS ON TERMINATION OF AC12 COUNT.—

13 ‘‘(A) IN GENERAL.—Paragraph (1) shall

14 be applied by substituting ‘5 percent’ for ‘10

15 percent’ in the case of any distribution made on

16 the termination date to the beneficiary of the

17 account.

18 ‘‘(B) ACCOUNT BECOMING AN INDIVIDUAL

19 RETIREMENT ACCOUNT.—If—

20 ‘‘(i) the election under subsection

21 (c)(1)(E)(ii) is made with respect to any

22 account, and

23 ‘‘(ii) the termination date occurs other

24 than by reason of the death of the account

25 beneficiary,
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1 the tax liability under this chapter of such ben2 eficiary for the taxable year which includes the

3 termination date shall be increased by an

4 amount equal to 20 percent of the balance in

5 such account on such date.

6 ‘‘(3) DISABILITY OR DEATH CASES.—Para7 graphs (1) and (2)(A) shall not apply if the distribu8 tion is made after the account beneficiary becomes

9 disabled within the meaning of section 72(m)(7) or

10 dies.

11 ‘‘(4) DISQUALIFICATION CASES.—Any amount

12 treated under paragraph (2) or (3) of subsection (e)

13 as distributed from a HEAP account shall be treat14 ed as a distribution to which the tax imposed by

15 paragraph (1) applies.

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

17 shall be applied without regard to any community property

18 laws.

19 ‘‘(h) CUSTODIAL ACCOUNTS.—For purposes of this

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

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

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

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

24 which he will administer the account will be consistent

25 with the requirements of this section, and if the custodial
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1 account would, except for the fact that it is not a trust,

2 constitute a HEAP account described in subsection (c)(1).

3 For purposes of this title, in the case of a custodial ac4 count treated as a trust by reason of the preceding sen5 tence, the custodian of such account shall be treated as

6 the trustee thereof.

7 ‘‘(i) REPORTS.—The trustee of a HEAP account

8 shall make such reports regarding such account to the

9 Secretary and to the individual for whose benefit the ac10 count is maintained with respect to contributions, dis11 tributions, and such other matters as the Secretary may

12 require under regulations. The reports required by this

13 subsection shall be filed at such time and in such manner

14 and furnished to such individuals at such time and in such

15 manner as may be required by those regulations.’’

16 (b) DEDUCTION ALLOWED IN ARRIVING AT AD17 JUSTED GROSS INCOME.—Subsection (a) of section 62 of

18 such Code (relating to retirement savings) is amended by

19 inserting after paragraph (16) the following new para20 graph:

21 ‘‘(17) EDUCATION SAVINGS.—The deduction al22 lowed by section 221 (relating to HEAP accounts).’’.

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

24 of such Code (relating to tax on excess contributions to
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1 individual retirement accounts, certain section 403(b) con2 tracts, and certain individual retirement annuities) is

3 amended—

4 (1) by inserting ‘‘HEAP ACCOUNTS,’’ after

5 ‘‘SAVINGS ACCOUNTS,’’ in the heading of such sec6 tion,

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

8 (1) of subsection (a),

9 (3) by redesignating paragraph (2) of sub10 section (a) as paragraph (3) and by inserting after

11 paragraph (1) the following new paragraph:

12 ‘‘(2) a HEAP account (within the meaning of

13 section 221(c)(1)), or’’, and

14 (4) by adding at the end the following new sub15 section:

16 ‘‘(e) EXCESS CONTRIBUTIONS TO HEAP AC17 COUNTS.—For purposes of this section, in the case of a

18 HEAP account, the term ‘excess contributions’ means the

19 amount by which the amount contributed for the taxable

20 year to the account exceeds the amount allowable as a de21 duction under section 221 for such taxable year. For pur22 poses of this subsection, any contribution which is distrib23 uted out of the HEAP account in a distribution to which

24 section 221(d)(3) applies shall be treated as an amount

25 not contributed.’’
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1 (d) TAX ON PROHIBITED TRANSACTIONS.—

2 (1) Subsection (c) of section 4975 of such Code

3 (relating to prohibited transactions) is amended by

4 adding at the end the following new paragraph:

5 ‘‘(5) SPECIAL RULE FOR HEAP ACCOUNTS.—An

6 individual for whose benefit a HEAP account is es7 tablished and any contributor to such account shall

8 be exempt from the tax imposed by this section with

9 respect to any transaction concerning such account

10 (which would otherwise be taxable under this sec11 tion) if, with respect to such transaction, the ac12 count ceases to be a HEAP account by reason of the

13 application of section 221(e)(2)(A) to such account.’’

14 (2) Paragraph (1) of section 4975(e) of such

15 Code is amended by striking ‘‘or’’ at the end of sub16 paragraph (D), by redesignating subparagraph (E)

17 as subparagraph (F), and by inserting after sub18 paragraph (D) the following new subparagraph:

19 ‘‘(E) a HEAP account described in section

20 221(c)(1), or’’.

21 (e) FAILURE TO PROVIDE REPORTS ON HEAP AC22 COUNTS.—

23 (1) Paragraph (2) of section 6693(a) of such

24 Code (relating to failure to provide reports on indi25 vidual retirement accounts or annuities) is amended
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1 by striking ‘‘and’’ at the end of subparagraph (A),

2 by striking the period at the end of subparagraph

3 (B) and inserting ‘‘, and’’, and by adding at the end

4 the following new subparagraph:

5 ‘‘(C) section 221(i) (relating to HEAP ac6 counts).’’.

7 (2) The heading for section 6693 of such Code

8 is amended to read as follows:

9 ‘‘SEC. 6693. FAILURE TO PROVIDE REPORTS ON INDIVIDUAL

10 RETIREMENT PLANS AND CERTAIN OTHER

11 SAVINGS PLANS.’’

12 (f) CLERICAL AMENDMENTS.—

13 (1) The table of sections for part VII of sub14 chapter B of chapter 1 of such Code is amended by

15 striking the item relating to section 221 and insert16 ing the following new items:

‘‘Sec. 221. HEAP accounts.

‘‘Sec. 222. Cross reference.’’

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

18 Code is amended by striking the item relating to sec19 tion 4973 and inserting the following new item:

‘‘Sec. 4973. Tax on excess contributions to individual retirement

accounts, medical savings accounts, HEAP accounts, certain 403(b) contracts, and certain individual retirement annuities.’’

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

21 chapter 68 of such Code is amended by striking the
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1 item relating to section 6693 and inserting the fol2 lowing new item:

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

plans and certain other savings plans.’’

3 (g) EFFECTIVE DATE.—The amendments made by

4 this section shall apply to contributions made in taxable

5 years beginning after December 31, 1997.

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