< Back to H.R. 3722 (103rd Congress, 1993–1994)

Text of the Education Savings Assistance Act of 1994

This bill was introduced on January 25, 1994, in a previous session of Congress, but was not enacted. The text of the bill below is as of Jan 25, 1994 (Introduced).

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HR 3722 IH

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.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ‘Education Savings Assistance Act of 1994’.

SEC. 2. TAX TREATMENT OF STATE EDUCATION SAVINGS ACCOUNTS.

    (a) IN GENERAL- Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to items specifically excluded from gross income) is amended by redesignating section 137 as section 138 and by adding after section 136 the following new section:

‘SEC. 137. EDUCATION SAVINGS ACCOUNTS.

    ‘(a) GENERAL RULE- Gross income shall not include any qualified education savings account distribution.

    ‘(b) QUALIFIED EDUCATION SAVINGS ACCOUNT DISTRIBUTION- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘qualified education savings account distribution’ means any amount paid or distributed out of an education savings account which would otherwise be includible in gross income to the extent such payment or distribution is used exclusively to pay qualified higher education expenses incurred by the designated beneficiary of the account.

      ‘(2) ROLLOVERS- The term ‘qualified education savings account distribution’ includes any transfer from an education savings account of one designated beneficiary to another such account of such beneficiary or to such an account of another designated beneficiary.

      ‘(3) SPECIAL RULES- The determination under paragraph (1) as to whether an amount is otherwise includible in gross income shall be made in the manner described in section 72, except that--

        ‘(A) all education savings accounts shall be treated as one contract,

        ‘(B) all distributions during any taxable year shall be treated as one distribution,

        ‘(C) contributions to an account described in subsection (c)(4)(B)(i) shall not be included in the basis of the account, and

        ‘(D) the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins.

    ‘(c) EDUCATION SAVINGS ACCOUNT- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘education savings account’ means a trust created or organized in the United States--

        ‘(A) pursuant to a qualified State educational savings plan, and

        ‘(B) exclusively for the purpose of paying the qualified higher education expenses of the designated beneficiary of the account.

      ‘(2) QUALIFIED STATE EDUCATIONAL SAVINGS PLAN- The term ‘qualified State educational savings plan’ means a plan established and maintained by a State or instrumentality thereof under which--

        ‘(A) participants may save to meet qualified higher education expenses of designated beneficiaries,

        ‘(B) planning and financial information is provided to participants about current and projected qualified higher education expenses,

        ‘(C) education savings account statements are provided to participants at least quarterly, and

        ‘(D) an audited financial statement is provided to participants at least annually.

      ‘(3) QUALIFIED HIGHER EDUCATION EXPENSES- The term ‘qualified higher education expenses’ means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965).

      ‘(4) LIMITATIONS- A trust shall not be treated as an education savings account unless the following requirements are met:

        ‘(A) No contribution will be accepted unless it is in cash, stocks, bonds, or other securities 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 invested 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 adjustment for the calendar year in which the taxable year begins.

        ‘(C) EDUCATION COST-OF-LIVING ADJUSTMENT- For purposes of subparagraph (B), the education cost-of-living adjustment for any calendar 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 sentence, any such account or plan shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).

      ‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE INDIVIDUAL ENGAGES IN PROHIBITED TRANSACTION-

        ‘(A) IN GENERAL- If the designated beneficiary of an education savings account is established or any individual who contributes to such account engages in any transaction prohibited by section 4975 with respect to the account, the account shall cease to be an education 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 account 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 SECURITY- If, during any taxable year, the individual for whose benefit an education savings account is established, or any individual who contributes to such account, uses the account or any portion thereof as security for a loan, the portion so used shall be treated as distributed to the individual so using such portion.

    ‘(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 EDUCATIONAL SAVINGS PLAN-

      (1) TREATMENT AS SECTION 501(C)(3) ORGANIZATION- Section 501(c)(3) of such Code is amended by inserting ‘or which is a qualified State education savings plan (as defined in section 137(c)(2)),’ after ‘animals,’.

      (2) CHARITABLE CONTRIBUTIONS-

        (A) Subparagraph (B) of section 170(c)(2) of such Code is amended by inserting ‘, or which is a qualified State education savings plan (as defined in section 137(c)(2)),’ after ‘animals’.

        (B) Section 170(b)(1)(A) of such Code is amended by striking ‘or’ at the end of clause (vii), by inserting ‘or’ at the end of clause (viii) and by inserting after clause (viii) the following new clause:

          ‘(ix) a qualified State educational savings plan (as defined in section 137(c)(2)).’

    (c) CONTRIBUTION NOT SUBJECT TO GIFT TAX- Section 2503 of such Code (relating to taxable gifts) is amended by adding at the end thereof the following new subsection:

    ‘(h) EDUCATION SAVINGS ACCOUNTS- Any contribution made by an individual to an education savings account described in section 137 shall not be treated as a transfer of property by gift for purposes of this chapter.’

    (d) 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 education savings account is established and any contributor 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 respect to such transaction, the account ceases to be an education savings account by reason of the application of section 137(d)(2)(A) to such account.’, and

      (2) by inserting ‘, an education savings account described in section 137(c),’ in subsection (e)(1) after ‘described in section 408(a)’.

    (e) FAILURE TO PROVIDE REPORTS ON EDUCATION SAVINGS ACCOUNTS- Section 6693 of such Code (relating to failure to provide reports on individual retirement accounts or annuities) is amended--

      (1) by inserting ‘or on education savings accounts’ after ‘annuities’ in the heading of such section, and

      (2) by adding at the end of subsection (a) the following new sentence: ‘Any person required by section 137(e) to file a report regarding an education savings account who fails to file the report at the time or in the manner required by such section shall pay a penalty of $50 for each failure, unless it is shown that such failure is due to reasonable cause.’

    (f) 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 paragraph:

      ‘(6) A distribution from an education savings account described in section 137(c) to the individual for whose benefit such account has been established 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 137.’

    (g) CLERICAL AMENDMENTS-

      (1) The table of sections for part III of subchapter B of chapter 1 of such Code is amended by striking out the item relating to section 137 and inserting the following new items:

‘Sec. 137. Education savings accounts.

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

      (2) The table of sections for subchapter B of chapter 68 of such Code is amended by striking out the item relating to section 6693 and inserting the following new item:

‘Sec. 6693. Failure to provide reports on individual retirement accounts or annuities or on education savings accounts.’

    (h) EFFECTIVE DATE- The amendments made by this section shall apply to contributions made in taxable years beginning after December 31, 1993.