‘‘(A) participants may save to meet quali-
fied higher education expenses of designated
beneficiaries,
‘‘(B) planning and financial information is
provided to participants about current and pro-
jected qualified higher education expenses,
‘‘(C) education savings account statements
are provided to participants at least quarterly,
and
‘‘(D) an audited financial statement is pro-
vided to participants at least annually.
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ means the cost of attendance (as defined in
section 472 of the Higher Education Act of 1965).
‘‘(4) LIMITATIONS.—A trust shall not be treat-
ed as an education savings account unless the follow-
ing requirements are met:
‘‘(A) No contribution will be accepted un-
less it is in cash, stocks, bonds, or other securi-
ties which are readily tradable on an established
securities market.
‘‘(B) Contributions will not be accepted for
any taxable year in excess of the applicable
limit. The preceding sentence shall not apply
to—
‘‘(i) contributions to the qualified
State educational savings plan which are
allocated to all education savings accounts
within the class for which the contribution
was made, or
‘‘(ii) rollover contributions described
in subsection (b)(2).
‘‘(C) The trust may not be established for
the benefit of more than one individual.
‘‘(D) The trustee is the qualified State
educational savings plan or person designated
by it.
‘‘(E) The assets of the trust may be in-
vested only in accordance with the qualified
State educational savings plan.
‘‘(5) APPLICABLE
LIMIT.—For purposes of
paragraph (4)(B)—
‘‘(A) IN GENERAL.—The applicable limit is
$3,000.
‘‘(B) INDEXING.—In the case of taxable
years beginning after December 31, 1994, the
$3,000 amount under subparagraph (A) shall
be increased by the education cost-of-living ad-
justment for the calendar year in which the tax-
able year begins.
‘‘(C) EDUCATION COST-OF-LIVING ADJUST-
MENT.—For purposes of subparagraph (B), the
education cost-of-living adjustment for any cal-
endar year is the percentage (if any) by
which—
‘‘(i) the higher education cost index
for the preceding calendar year, exceeds
‘‘(ii) such index for 1993.
‘‘(D) HIGHER EDUCATION COST INDEX.—
For purposes of subparagraph (C), the higher
education cost index for any calendar year is
the average qualified higher education expenses
for undergraduate students at both private and
public institutions of higher education for the
12-month period ending on August 31 of the
calendar year. The Secretary of Education shall
provide for the computation and publication of
the higher education cost index.
‘‘(d) TAX TREATMENT OF ACCOUNTS AND STATE
PLANS.—
‘‘(1) EXEMPTION
FROM
TAX.—An education
savings account shall be exempt from taxation under
this subtitle. Notwithstanding the preceding sen-
tence, any such account or plan shall be subject to
the taxes imposed by section 511 (relating to imposi-
tion of tax on unrelated business income of chari-
table, etc. organizations).
‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE
INDIVIDUAL
ENGAGES
IN
PROHIBITED
TRANS-
ACTION.—
‘‘(A) IN GENERAL.—If the designated ben-
eficiary of an education savings account is es-
tablished 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, an amount equal to the
fair market value of all assets in the account
shall be treated as having been distributed 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.
‘‘(e) REPORTS.—The Secretary may require the
trustee of an education savings account to make reports
regarding such account to the Secretary, to the individual
who has established the account, and to the designated
beneficiary of the account with respect to contributions,
distributions, and such other matters as the Secretary
may require. The reports required by this subsection shall
be filed at such time and in such manner and furnished
to such individuals at such time and in such manner as
may be required by those regulations.’’
(b) TAX TREATMENT OF QUALIFIED STATE EDU-
CATIONAL SAVINGS PLAN.—
(1) TREATMENT AS SECTION 501(C)(3) ORGANI-
ZATION.—Section 501(c)(3) of such Code is amend-
ed by inserting ‘‘or which is a qualified State edu-
cation 
savings 
plan 
(as 
defined 
in 
section
137(c)(2)),’’ after ‘‘animals,’’.