‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—Paragraph (1) does
not apply to the distribution of any contribution paid
during a taxable year to an education savings ac-
count to the extent that such contribution exceeds
the amount allowable as a deduction under sub-
section (a) if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such individual’s return
for such taxable year,
‘‘(B) no deduction is allowed under sub-
section (a) with respect to such excess contribu-
tion, 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.
‘‘(5) DISTRIBUTIONS TO INDIVIDUAL RETIRE-
MENT PLANS.—Paragraph (1) shall not apply to any
payment or distribution out of an education savings
account if—
‘‘(A) before the close of the 60th day after
the day on which the payment or distribution is
received, the payment or distribution is contrib-
uted into an individual retirement plan of an in-
dividual who contributed to the education sav-
ings account, and
‘‘(B) the amount of such payment or dis-
tribution (when added to all prior payments or
distributions excluded from the gross income of
such individual by reason of this paragraph)
does not exceed the aggregate amount contrib-
uted to the education savings account by the in-
dividual from amounts paid or distributed out
of an individual retirement plan in accordance
with section 408(d)(8).
‘‘(e) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) EXEMPTION
FROM
TAX.—An education
savings account is exempt from taxation under this
subtitle unless such account has ceased to be an
education savings 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 unre-
lated business income of charitable, etc. organiza-
tions).
‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE
INDIVIDUAL
ENGAGES
IN
PROHIBITED
TRANS-
ACTION.—
‘‘(A) IN GENERAL.—If the individual for
whose benefit an education savings account is
established or any individual who contributes to
such account engages in any transaction prohib-
ited by section 4975 with respect to the ac-
count, the account shall cease to be an edu-
cation savings 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 ac-
count ceases to be an education savings account
by reason of subparagraph (A) as of the first
day of any taxable year, paragraph (1) of sub-
section (d) shall apply as if there was a dis-
tribution 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 SECU-
RITY.—If, during any taxable year, the individual for
whose benefit an education savings account is estab-
lished, or any individual who contributes to such ac-
count, uses the account or any portion thereof as se-
curity for a loan, the portion so used shall be treated
as distributed to the individual so using such por-
tion.
‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN-
CLUDED IN GROSS INCOME.—
‘‘(1) DISTRIBUTION
NOT
USED
FOR
EDU-
CATIONAL EXPENSES.—In the case of any payment
or distribution to which subsection (d)(1) applies,
the tax liability of each payee or distributee under
this chapter for the taxable year in which the pay-
ment or distribution is received shall be increased by
an amount equal to 10 percent of the amount of the
distribution which is includible in the gross income
of such payee or distributee for such taxable year.
‘‘(2) DISQUALIFICATION CASES.—If an amount
is includible in the gross income of an individual for
a taxable year because such amount is required to
be treated as a distribution under paragraph (2) or
(3) of subsection (e), such individual’s tax liability
under this chapter for such taxable year shall be in-
creased by an amount equal to 10 percent of such
amount required to be treated as a distribution and
included in his gross income.
‘‘(3) DISABILITY
OR
DEATH
CASES.—Para-
graphs (1) and (2) shall not apply if the payment
or distribution is made after the individual for whose
benefit the education savings account becomes dis-
abled within the meaning of section 72(m)(7) or
dies.
‘‘(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 an education savings account described in sub-
section (c)(2). 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 an education savings
account shall make such reports regarding such account
to the Secretary and to the individual for whose benefit
(3) by redesignating paragraph (2) of sub-
section (a) as paragraph (3) and by inserting after
paragraph (1) the following new paragraph:
‘‘(2) an education savings account (within the
meaning of section 220(c)(2)), or’’, and
(4) by adding at the end the following new sub-
section:
‘‘(d) EXCESS CONTRIBUTIONS TO EDUCATION SAV-
INGS ACCOUNTS.—For purposes of this section, in the
case of an education savings account, the term ‘excess con-
tributions’ means the amount by which the amount con-
tributed 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 education sav-
ings account in a distribution to which section 220(d)(4)
applies shall be treated as an amount not contributed.’’
(d) CONTRIBUTION NOT SUBJECT TO GIFT TAX.—
Section 2503 of such Code (relating to taxable gifts) is
amended by adding at the end the following new sub-
section:
‘‘(h) EDUCATION SAVINGS ACCOUNTS.—Any con-
tribution made by an individual to an education savings
account described in section 220(c)(2) which is allowable
as a deduction under section 220 shall not be treated as
a transfer of property by gift for purposes of this
chapter.’’
(e) 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 EDUCATION SAVINGS
ACCOUNTS.—An individual for whose benefit an edu-
cation savings account is established and any con-
tributor 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 re-
spect to such transaction, the account ceases to be
an education savings account by reason of the appli-
cation of section 220(e)(2)(A) to such account.’’,
and
(2) by inserting ‘‘, an education savings account
described in section 220(c)(2),’’ in subsection (e)(1)
after ‘‘described in section 408(a)’’.
(f) FAILURE TO PROVIDE REPORTS ON EDUCATION
SAVINGS ACCOUNTS.—Section 6693 of such Code (relat-
ing to failure to provide reports on individual retirement
accounts or annuities) is amended—
(1) by inserting ‘‘OR ON EDUCATION SAV-
INGS
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 sec-
tion 220(i) to file a report regarding an education
savings account at the time and in the manner re-
quired by such section shall pay a penalty of $50 for
each failure, unless it is shown that such failure is
due to reasonable cause.’’
(g) SPECIAL RULE FOR DETERMINING AMOUNTS OF
SUPPORT FOR DEPENDENT.—Subsection (b) of section
152 of such Code (relating to definition of dependent) is
amended by adding at the end the following new para-
graph:
‘‘(6) A distribution from an education savings
account described in section 220(c)(2) to the individ-
ual for whose benefit such account has been estab-
lished shall not be taken into account in determining
support for purposes of this section to the extent
such distribution is excluded from gross income of
such individual under section 220(d)(2).’’
(h) CLERICAL AMENDMENTS.—
(1) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by
striking the item relating to section 220 and insert-
ing the following new items:
‘‘Sec. 220. Education savings accounts.
‘‘Sec. 221. Cross reference.’’
(2) The table of sections for chapter 43 of such
Code is amended by striking the item relating to sec-
tion 4973 and inserting the following new item:
‘‘Sec. 4973. Tax on excess contributions to individual retirement
accounts, 
education 
savings 
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 the
item relating to section 6693 and inserting the fol-
lowing new item:
‘‘Sec. 6693. Failure to provide reports on individual retirement
accounts or annuities or on education savings ac-
counts.’’
SEC. 2. TRANSFERS BETWEEN INDIVIDUAL RETIREMENT
PLANS AND EDUCATION SAVINGS ACCOUNTS.
(a) EXEMPTION FROM ANNUAL CONTRIBUTION LIM-
ITATION FOR DISTRIBUTIONS FROM EDUCATION SAVINGS
ACCOUNTS INTO IRA’S.—Paragraph (1) of section 408(a)
of the Internal Revenue Code of 1986 (relating to defini-
tion of individual retirement account) is amended by in-
serting after ‘‘403(b)(8),’’ the following: ‘‘or in the case
of a contribution from an education savings account in ac-
cordance with section 220(d)(5),’’.
(b) EXCLUSION FROM GROSS INCOME
FOR DIS-
TRIBUTIONS FROM IRA’S INTO EDUCATION SAVINGS AC-
COUNTS.—Subsection (d) of section 408 of such Code (re-
lating to tax treatment of distributions from individual re-
tirement plans) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(8) DISTRIBUTIONS
USED
TO
MAKE
CON-
TRIBUTION
TO
EDUCATION
SAVINGS
ACCOUNT.—
Paragraph (1) shall not apply to any amount paid
or distributed out of an individual retirement plan if,
before the close of the 60th day after the day on
which the payment or distribution is received, the
payment or distribution is contributed into an edu-
cation savings account (as defined in section
220(c)(2)).
SEC. 3. EFFECTIVE DATE.
The amendments made by this Act shall apply to tax-
able years beginning after December 31, 1994.
Æ
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