I

103D CONGRESS

1ST SESSION H. R. 1863

To amend the Internal Revenue Code of 1986 to allow a deduction for

contributions to education savings accounts and to provide that amounts

paid from such an account for educational expenses shall never be subject

to income tax.

IN THE HOUSE OF REPRESENTATIVES

APRIL 27, 1993

Mr. ARMEY (for himself, Mr. COX, Mr. KYL, Mr. GALLO, and Mr. BOUCHER)

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 allow a

deduction for contributions to education savings accounts

and to provide that amounts paid from such an account

for educational expenses shall never be subject to income

tax.

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 ‘‘Family Education As5 sistance Act of 1993’’.
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1 SEC. 2. EDUCATION SAVINGS ACCOUNTS.

2 (a) IN GENERAL.—Part VII of subchapter B of chap3 ter 1 of the Internal Revenue Code of 1986 (relating to

4 additional itemized deductions for individuals) is amended

5 by redesignating section 220 as section 221 and by insert6 ing after section 219 the following new section:

7 ‘‘SEC. 220. EDUCATION SAVINGS ACCOUNTS.

8 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi9 vidual, there shall be allowed as a deduction the sum of—

10 ‘‘(1) amounts paid in cash, and

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

12 of stocks, bonds, or other securities, which are read13 ily tradable on an established securities market,

14 transferred,

15 during the calendar year which ends with or within the

16 taxable year by such individual to an education savings

17 account established for the purpose of accumulating funds

18 to pay the educational expenses of an eligible individual.

19 ‘‘(b) LIMITATIONS.—

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

21 BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu22 cation savings account may not be established for

23 the benefit of more than 1 individual.

24 ‘‘(2) ELIGIBLE INDIVIDUAL TREATED AS ELIGI25 BLE INDIVIDUAL ONLY WITH RESPECT TO 1 AC26 COUNT.—If, at any time during a calendar year, 2
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1 or more education savings accounts are maintained

2 for the benefit of an eligible individual, such individ3 ual shall be treated as an eligible individual for the

4 calendar year only with respect to the first of such

5 accounts.

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

7 The amount allowable as a deduction under sub8 section (a) to an individual for amounts paid or

9 transferred to an education savings account for any

10 taxable year shall not exceed $1,500.

11 ‘‘(4) NO DEDUCTION AFTER BENEFICIARY AT12 TAINS AGE 19.—No deduction shall be allowed for

13 any contribution to an education savings account es14 tablished for the benefit of an eligible individual who

15 has attained age 19 before the close of the calendar

16 year in which such contribution is made.

17 ‘‘(5) ADJUSTMENT OF DOLLAR AMOUNT LIMI18 TATIONS FOR INFLATION.—

19 ‘‘(A) IN GENERAL.—Not later than Octo20 ber 1 of 1994 and each succeeding calendar

21 year, the Secretary shall determine, and publish

22 in the Federal Register, the amount which shall

23 apply in lieu of the amount of the limitation

24 contained in paragraph (3) and subsection
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1 (c)(2)(A) with respect to taxable years begin2 ning in the next succeeding calendar year.

3 ‘‘(B) METHOD OF DETERMINING

4 AMOUNT.—The amount of the limitation which

5 shall apply in lieu of the amount of the limita6 tion contained in paragraph (3) and subsection

7 (c)(2)(A) with respect to taxable years begin8 ning in any calendar year shall be determined

9 by multiplying the amount contained in such

10 subparagraph and such subsection by the infla11 tion adjustment factor.

12 ‘‘(C) INFLATION ADJUSTMENT FACTOR.—

13 For purposes of subparagraph (B), the inflation

14 adjustment factor for any calendar year is a

15 fraction the numerator of which is the average

16 of the Consumer Price Index as of the close of

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

18 preceding calendar year and the denominator of

19 which is the average of the Consumer Price

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

21 ending on July 31, 1993.

22 ‘‘(D) CONSUMER PRICE INDEX.—For pur23 poses of subparagraph (C), the term ‘Consumer

24 Price Index’ has the meaning given such term

25 by section 1(f)(5).
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1 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur2 poses of this section—

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

4 individual’ means an individual who is—

5 ‘‘(A) a child (within the meaning of section

6 151(c)(3)) of the taxpayer or of a brother, sis7 ter, stepbrother, or stepsister of the taxpayer,

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

9 the taxpayer has been appointed guardian by a

10 court of competent jurisdiction, or

11 ‘‘(C) a descendant of a child of the tax12 payer.

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

14 term ‘education savings account’ means a trust cre15 ated or organized in the United States exclusively

16 for the purpose of paying the educational expenses

17 of an eligible individual, but only if the written gov18 erning instrument creating the trust meets the fol19 lowing requirements:

20 ‘‘(A) No contribution will be accepted un21 less it is in cash, stocks, bonds, or other securi22 ties which are readily tradable on an established

23 securities market, and, except in the case of

24 contributions from another education savings
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1 account, contributions will not be accepted for

2 the taxable year in excess of $1,500.

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 (other than

11 contracts the beneficiary of which is the trust

12 and the face amount of which does not exceed

13 the amount by which the maximum amount

14 which can be contributed to the account exceeds

15 the sum of the amounts contributed to the ac16 count for all taxable years).

17 ‘‘(D) The assets of the account may be in18 vested in accordance with the direction of the

19 individual contributing to the account, but, if

20 more than one individual has made contribu21 tions to the account, the consent of all such in22 dividuals shall be required for any such direc23 tion.

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

25 commingled with other property except in a
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1 common trust fund or common investment

2 fund.

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

4 day after the date on which the individual for

5 whose benefit the trust is established attains

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

7 individual dies) shall be distributed within 30

8 days of such date—

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

10 to each of the individuals who have con11 tributed to the trust, or

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

13 to another education savings account es14 tablished for the benefit of an eligible indi15 vidual who has not attained age 30 or to

16 an eligible educational institution.

17 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

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

19 contribution on the last day of the preceding taxable

20 year if the contribution is made on account of such

21 taxable year and is made not later than the time

22 prescribed by law for filing the return for such tax23 able year (including extensions thereof).

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

25 TRANSFER DATE.—The fair market value of stocks,
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1 bonds, and other securities shall be determined as of

2 the date on which they are transferred to the ac3 count. If the date of transfer falls on a Saturday,

4 Sunday, or public legal holiday, then the fair market

5 value shall be determined by reference to the last

6 preceding day on which they could have been traded

7 on an established securities market.

8 ‘‘(5) DISTRIBUTION OF BALANCE IN ACCOUNT

9 TO CONTRIBUTORS.—The Secretary shall prescribe

10 regulations describing the manner in which any bal11 ance in the educational savings account shall be dis12 tributed under paragraph (2)(F)(i) among the con13 tributors to the account. Any division of the balance

14 in the account shall reflect—

15 ‘‘(A) the amount of net income of the ac16 count which is attributable to the contributions

17 of each such individual, and

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

19 previously distributed from the account for edu20 cational expenses among the contributions

21 which were made before any such distribution

22 (including the net income of the account which

23 was attributable to such contributions and

24 earned before any such distribution).
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1 ‘‘(6) EDUCATIONAL EXPENSES.—The term

2 ‘educational expenses’ means—

3 ‘‘(A) tuition and fees required for the en4 rollment or attendance of a student at an eligi5 ble educational institution,

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

7 required for courses of instruction at an eligible

8 educational institution, and

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

10 lodging while attending an eligible educational

11 institution.

12 ‘‘(7) ELIGIBLE EDUCATIONAL INSTITUTION.—

13 The term ‘eligible educational institution’ means—

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

15 ‘‘(B) a vocational school.

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

17 The term ‘institution of higher education’ means the

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

19 of the Higher Education Act of 1965.

20 ‘‘(9) VOCATIONAL SCHOOL.—The term ‘voca21 tional school’ means an area vocational education

22 school as defined in subparagraph (C) or (D) of sec23 tion 195(2) of the Vocational Education Act of 1963

24 to the extent such school is located within any State

25 (as defined in section 195(8) of such Act).
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1 ‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—

2 ‘‘(1) IN GENERAL.—Except as otherwise pro3 vided in this subsection, any amount paid or distrib4 uted out of an education savings account shall be in5 cluded in gross income of the payee or distributee

6 for the taxable year in which the payment or dis7 tribution is received to the extent such amount is

8 not the return of a contribution for which no deduc9 tion was allowed under subsection (a).

10 ‘‘(2) DISTRIBUTION USED TO PAY EDU11 CATIONAL EXPENSES.—Paragraph (1) shall not

12 apply to any payment or distribution out of an edu13 cation savings account to the extent such payment

14 or distribution is used exclusively to pay the edu15 cational expenses incurred by the individual for

16 whose benefit the account is established.

17 ‘‘(3) DISTRIBUTIONS TO ANOTHER ACCOUNT OR

18 TO ELIGIBLE EDUCATIONAL INSTITUTION.—Para19 graph (1) shall not apply to any distribution under

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

21 ‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE22 FORE DUE DATE OF RETURN.—Paragraph (1) does

23 not apply to the distribution of any contribution paid

24 during a taxable year to an education savings ac25 count to the extent that such contribution exceeds
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1 the amount allowable as a deduction under sub2 section (a) if—

3 ‘‘(A) such distribution is received on or be4 fore the day prescribed by law (including exten5 sions of time) for filing such individual’s return

6 for such taxable year,

7 ‘‘(B) no deduction is allowed under sub8 section (a) with respect to such excess contribu9 tion, and

10 ‘‘(C) such distribution is accompanied by

11 the amount of net income attributable to such

12 excess contribution.

13 Any net income described in subparagraph (C) shall

14 be included in the gross income of the individual for

15 the taxable year in which such excess contribution

16 was made.

17 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—

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

19 savings account is exempt from taxation under this

20 subtitle unless such account has ceased to be an

21 education savings account by reason of paragraph

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

23 any such account is subject to the taxes imposed by

24 section 511 (relating to imposition of tax on unre-
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1 lated business income of charitable, etc. organiza2 tions).

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

4 INDIVIDUAL ENGAGES IN PROHIBITED TRANS5 ACTION.—

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

7 whose benefit an education savings account is

8 established or any individual who contributes to

9 such account engages in any transaction prohib10 ited by section 4975 with respect to the ac11 count, the account shall cease to be an edu12 cation savings account as of the first day of the

13 taxable year (of the individual so engaging in

14 such transaction) during which such transaction

15 occurs.

16 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

17 ALL ITS ASSETS.—In any case in which any ac18 count ceases to be an education savings account

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

20 day of any taxable year, paragraph (1) of sub21 section (d) shall apply as if there was a dis22 tribution on such first day in an amount equal

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

24 all assets in the account (on 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 ‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN10 CLUDED IN GROSS INCOME.—

11 ‘‘(1) DISTRIBUTION NOT USED FOR EDU12 CATIONAL EXPENSES.—In the case of any payment

13 or distribution to which subsection (d)(1) applies,

14 the tax liability of each payee or distributee under

15 this chapter for the taxable year in which the pay16 ment or distribution is received shall be increased by

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

18 distribution which is includible in the gross income

19 of such payee or distributee for such taxable year.

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

21 is includible in the gross income of an individual for

22 a taxable year because such amount is required to

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

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

25 under this chapter for such taxable year shall be in-
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1 creased by an amount equal to 10 percent of such

2 amount required to be treated as a distribution and

3 included in his gross income.

4 ‘‘(3) DISABILITY OR DEATH CASES.—Para5 graphs (1) and (2) shall not apply if the payment

6 or distribution is made after the individual for whose

7 benefit the education savings account becomes dis8 abled within the meaning of section 72(m)(7) or

9 dies.

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

11 shall be applied without regard to any community property

12 laws.

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

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

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

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

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

18 which he will administer the account will be consistent

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

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

21 constitute an education savings account described in sub22 section (c)(2). For purposes of this title, in the case of

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

24 preceding sentence, the custodian of such account shall be

25 treated as the trustee thereof.
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1 ‘‘(i) REPORTS.—The trustee of an education savings

2 account shall make such reports regarding such account

3 to the Secretary and to the individual for whose benefit

4 the account is maintained with respect to contributions,

5 distributions, and such other matters as the Secretary

6 may require under regulations. The reports required by

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

8 manner and furnished to such individuals at such time and

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

10 (b) DEDUCTION ALLOWED IN ARRIVING AT AD11 JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)

12 of such Code (relating to retirement savings) is amend13 ed—

14 (1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE15 TIREMENT’’ in the heading of such paragraph, and

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

17 thereof the following: ‘‘and the deduction allowed by

18 section 220 (relating to education savings ac19 counts)’’.

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

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

22 individual retirement accounts, certain section 403(b) con23 tracts, and certain individual retirement annuities) is

24 amended—
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1 (1) by inserting ‘‘EDUCATION SAVINGS AC2 COUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading of

3 such section,

4 (2) by striking out ‘‘or’’ at the end of para5 graph (1) of subsection (a),

6 (3) by redesignating paragraph (2) of sub7 section (a) as paragraph (3) and by inserting after

8 paragraph (1) the following new paragraph:

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

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

11 (4) by adding at the end thereof the following

12 new subsection:

13 ‘‘(d) EXCESS CONTRIBUTIONS TO EDUCATION SAV14 INGS ACCOUNTS.—For purposes of this section, in the

15 case of an education savings account, the term ‘excess con16 tributions’ means the amount by which the amount con17 tributed for the taxable year to the account exceeds the

18 amount allowable as a deduction under section 220 for

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

20 contribution which is distributed out of the education sav21 ings account in a distribution to which section 220(d)(4)

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

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

24 Section 2503 of such Code (relating to taxable gifts) is
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1 amended by adding at the end thereof the following new

2 subsection:

3 ‘‘(h) EDUCATION SAVINGS ACCOUNTS.—Any con4 tribution made by an individual to an education savings

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

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

7 a transfer of property by gift for purposes of this chap8 ter.’’

9 (e) TAX ON PROHIBITED TRANSACTIONS.—Section

10 4975 of such Code (relating to prohibited transactions)

11 is amended—

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

13 following new paragraph:

14 ‘‘(4) SPECIAL RULE FOR EDUCATION SAVINGS

15 ACCOUNTS.—An individual for whose benefit an edu16 cation savings account is established and any con17 tributor to such account shall be exempt from the

18 tax imposed by this section with respect to any

19 transaction concerning such account (which would

20 otherwise be taxable under this section) if, with re21 spect to such transaction, the account ceases to be

22 an education savings account by reason of the appli23 cation of section 220(e)(2)(A) to such account.’’,

24 and
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1 (2) by inserting ‘‘, an education savings account

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

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

4 (f) FAILURE TO PROVIDE REPORTS ON EDUCATION

5 SAVINGS ACCOUNTS.—Section 6693 of such Code (relat6 ing to failure to provide reports on individual retirement

7 accounts or annuities) is amended—

8 (1) by inserting ‘‘OR ON EDUCATION SAV9 INGS ACCOUNTS’’ after ‘‘ANNUITIES’’ in the

10 heading of such section, and

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

12 following new sentence: ‘‘The person required by sec13 tion 220(i) to file a report regarding an education

14 savings account at the time and in the manner re15 quired by such section shall pay a penalty of $50 for

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

17 due to reasonable cause.’’.

18 (g) SPECIAL RULE FOR DETERMINING AMOUNTS OF

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

20 152 of such Code (relating to definition of dependent) is

21 amended by adding at the end thereof the following new

22 paragraph:

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

24 account described in section 220(c)(2) to the individ25 ual for whose benefit such account has been estab-
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1 lished shall not be taken into account in determining

2 support for purposes of this section to the extent

3 such distribution is excluded from gross income of

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

5 (h) CLERICAL AMENDMENTS.—

6 (1) The table of sections for part VII of sub7 chapter B of chapter 1 of such Code is amended by

8 striking out the item relating to section 220 and in9 serting in lieu thereof the following new items:

‘‘Sec. 220. Education savings accounts.

‘‘Sec. 221. Cross reference.’’

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

11 Code is amended by striking out the item relating to

12 section 4973 and inserting in lieu thereof the follow13 ing new item:

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

accounts, education savings accounts, certain

403(b) contracts, and certain individual retirement

annuities.’’

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

15 chapter 68 of such Code is amended by striking out

16 the item relating to section 6693 and inserting in

17 lieu thereof the following new item:

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

accounts or annuities or on education savings accounts.’’

18 (i) EFFECTIVE DATE.—The amendments made by

19 this section shall apply to contributions made in taxable

20 years beginning after December 31, 1993.
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