2000 
[DOCID: f:s335is.txt]






107th CONGRESS
  1st Session
                                 S. 335

To amend the Internal Revenue Code of 1986 to provide an exclusion from 
 gross income for distributions from qualified State tuition programs 
   which are used to pay education expenses, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           February 14, 2001

 Mr. McConnell (for himself, Mr. Graham, Mr.  Bunning, Mr. DeWine, Mr. 
 Warner, and Mr. Lugar) introduced the following bill; which was read 
             twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to provide an exclusion from 
 gross income for distributions from qualified State tuition programs 
   which are used to pay education expenses, 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 ``Setting Aside for a Valuable 
Education (SAVE) Act''.

SEC. 2. EXCLUSION FROM GROSS INCOME OF EDUCATION DISTRIBUTIONS FROM 
              QUALIFIED STATE TUITION PROGRAMS.

    (a) In General.--Subparagraph (B) of section 529(c)(3) of the 
Internal Revenue Code of 1986 (relating to distributions) is amended to 
read as follows:
                    ``(B) Distributions for qualified higher education 
                expenses.--For purposes of this paragraph--
                            ``(i) In-kind distributions.--No amount 
                        shall be includible in gross income under 
                        subparagraph (A) by reason of a distribution 
                        which consists of providing a benefit to the 
                        distributee which, if paid for by the 
                        distributee, would constitute payment of a 
                        qualified higher education expense.
                            ``(ii) Cash distributions.--In the case of 
                        distributions not described in clause (i), if--
                                    ``(I) such distributions do not 
                                exceed the qualified higher education 
                                expenses (reduced by expenses described 
                                in clause (i)), no amount shall be 
                                includible in gross income, and
                                    ``(II) in any other case, the 
                                amount otherwise includible in gross 
                                income shall be reduced by an amount 
                                which bears the same ratio to such 
                                amount as such expenses bear to such 
                                distributions.
                            ``(iii) Exception for institutional 
                        programs.--In the case of any taxable year 
                        beginning before January 1, 2004, clauses (i) 
                        and (ii) shall not apply with respect to any 
                        distribution during such taxable year under a 
                        qualified State tuition program established and 
                        maintained by 1 or more eligible educational 
                        institutions.
                            ``(iv) Treatment as distributions.--Any 
                        benefit furnished to a designated beneficiary 
                        under a qualified State tuition program shall 
                        be treated as a distribution to the beneficiary 
                        for purposes of this paragraph.
                            ``(v) Coordination with hope and lifetime 
                        learning credits.--The total amount of 
                        qualified higher education expenses with 
                        respect to an individual for the taxable year 
                        shall be reduced--
                                    ``(I) as provided in section 
                                25A(g)(2), and
                                    ``(II) by the amount of such 
                                expenses which were taken into account 
                                in determining the credit allowed to 
                                the taxpayer or any other person under 
                                section 25A.
                            ``(vi) Coordination with education savings 
                        accounts.--If, with respect to an individual 
                        for any taxable year--
                                    ``(I) the aggregate distributions 
                                to which clauses (i) and (ii) and 
                                section 530(d)(2)(A) apply, exceed
                                    ``(II) the total amount of 
                                qualified higher education expenses 
                                otherwise taken into account under 
                                clauses (i) and (ii) (after the 
                                application of clause (iv)) for such 
                                year,
                        the taxpayer shall allocate such expenses among 
                        such distributions for purposes of determining 
                        the amount of the exclusion under clauses (i) 
                        and (ii) and section 530(d)(2)(A).''.
    (b) Conforming Amendments.--
            (1) Section 135(d)(2)(B) of the Internal Revenue Code of 
        1986 is amended by striking ``section 530(d)(2)'' and inserting 
        ``sections 529(c)(3)(B)(i) and 530(d)(2)''.
            (2) Section 221(e)(2)(A) of such Code is amended by 
        inserting ``529,'' after ``135,''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

SEC. 3. ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO MAINTAIN 
              QUALIFIED TUITION PROGRAMS.

    (a) In General.--Section 529(b)(1) of the Internal Revenue Code of 
1986 (defining qualified State tuition program) is amended by inserting 
``or by 1 or more eligible educational institutions'' after 
``maintained by a State or agency or instrumentality thereof''.
    (b) Private Qualified Tuition Programs Limited to Benefit Plans.--
Clause (ii) of section 529(b)(1)(A) of the Internal Revenue Code of 
1986 is amended by inserting ``in the case of a program established and 
maintained by a State or agency or instrumentality thereof,'' before 
``may make''.
    (c) Additional Requirements for Certain Private Qualified Tuition 
Programs.--Section 529(b) of the Internal Revenue Code of 1986 is 
amended by adding at the end the following new paragraph:
            ``(8) Additional requirements for certain private qualified 
        tuition programs.--A program established and maintained by 1 or 
        more eligible educational institutions and described in 
        paragraph (1)(A)(ii) shall not be treated as a qualified 
        tuition program unless--
                    ``(A) under such program a trust is created or 
                organized for the sole purpose of paying the qualified 
                higher education expenses of the designated beneficiary 
                of the account,
                    ``(B) the written governing instrument creating the 
                trust of which the account is a part provides 
                safeguards to ensure that contributions made on behalf 
                of a designated beneficiary remain available to provide 
                for the qualified higher education expenses of the 
                designated beneficiary, and
                    ``(C) the trust meets the following requirements:
                            ``(i) Any trustee or person who may under 
                        contract operate or manage the trust 
                        de
1beb
monstrates to the satisfaction of the 
                        Secretary that the manner in which that trustee 
                        or person will administer the trust will be 
                        consistent with the requirements of this 
                        section.
                            ``(ii) The assets of the trust are not 
                        commingled with other property except in a 
                        common trust fund or common investment fund.
                            ``(iii) The trust annually prepares and 
                        makes available the reports and accountings 
                        required by this section. The annual report, at 
                        a minimum, includes information on the 
                        financial condition of the trust and the 
                        investment policy of the trust.
                            ``(iv) Before entering into contracts or 
                        otherwise accepting contributions on behalf of 
                        a designated beneficiary, the trust obtains an 
                        appropriate actuarial report to establish, 
                        maintain, and certify that the trust shall have 
                        sufficient assets to defray the obligations of 
                        the trust and annually makes the actuarial 
                        report available to account contributors and 
                        designated beneficiaries.
                            ``(v) The trust secures a favorable ruling 
                        or opinion issued by the Internal Revenue 
                        Service that the trust is in compliance with 
                        the requirements of this section.
                            ``(vi) Before entering into contracts or 
                        otherwise accepting contributions on behalf of 
                        a designated beneficiary, the trust solicits 
                        answers to appropriate ruling requests from the 
                        Securities and Exchange Commission regarding 
                        the application of Federal securities laws to 
                        the trust.''.
    (d) Application of Federal Securities Laws to Private Qualified 
Tuition Programs.--Section 529(e) of the Internal Revenue Code of 1986 
(relating to other definitions and special rules) is amended by adding 
at the end the following new paragraph:
            ``(6) Application of federal securities laws to private 
        qualified tuition programs.--Nothing in this section shall be 
        construed to exempt any qualified tuition program that is not 
        established and maintained by a State or agency or 
        instrumentality thereof from any of the requirements of the 
        Securities Act of 1933 (15 U.S.C 77a et seq.) or the Investment 
        Company Act of 1940 (15 U.S.C 80a-1 et seq.).''.
    (e) Conforming Amendments.--
            (1) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 529, 
        530(b)(2)(B), 4973(e), and 6693(a)(2)(C) of the Internal 
        Revenue Code of 1986 are each amended by striking ``qualified 
        State tuition'' each place it appears and inserting ``qualified 
        tuition''.
            (2) The headings for sections 72(e)(9) and 135(c)(2)(C) of 
        such Code are each amended by striking ``qualified state 
        tuition'' and inserting ``qualified tuition''.
            (3) The headings for sections 529(b) and 530(b)(2)(B) of 
        such Code are each amended by striking ``Qualified state 
        tuition'' and inserting ``Qualified tuition''.
            (4) The heading for section 529 of such Code is amended by 
        striking ``state''.
            (5) The item relating to section 529 of such Code in the 
        table of sections for part VIII of subchapter F of chapter 1 is 
        amended by striking ``State''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.

SEC. 4. OTHER MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

    (a) Rollover to Different Program for Benefit of Same Designated 
Beneficiary.--Section 529(c)(3)(C) of the Internal Revenue Code of 1986 
(relating to change in beneficiaries) is amended--
            (1) by striking ``transferred to the credit'' in clause (i) 
        and inserting ``transferred--
                                    ``(I) to another qualified tuition 
                                program for the benefit of the 
                                designated beneficiary, or
                                    ``(II) to the credit'',
            (2) by adding at the end the following new clause:
                            ``(iii) Limitation on certain rollovers.--
                        Clause (i)(I) shall only apply to 1 transfer 
                        with respect to a designated beneficiary in any 
                        year.'', and
            (3) by inserting ``or programs'' after ``beneficiaries'' in 
        the heading.
    (b) Member of Family Includes First Cousin.--Section 529(e)(2) of 
the Internal Revenue Code of 1986 (defining member of family) is 
amended by striking ``and'' at the end of subparagraph (B), by striking 
the period at the end of subparagraph (C) and by inserting ``; and'', 
and by adding at the end the following new subparagraph:
                    ``(D) any first cousin of such beneficiary.''.
    (c) Adjustment of Limitation on Room and Board Distributions.--
Section 529(e)(3)(B)(ii) of the Internal Revenue Code of 1986 is 
amended to read as follows:
                            ``(ii) Limitation.--The amount treated as 
                        qualified higher education expenses by reason 
                        of clause (i) shall not exceed the greater of--
                                    ``(I) the amount (applicable to the 
                                student) included for room and board 
                                for such period in the cost of 
                                attendance (as defined in section 472 
                                of the Higher Education Act of 1965 (20 
                                U.S.C. 1087ll), as in effect on the 
                                date of the enactment of the Setting 
                                Aside for a Valuable Education (SAVE) 
                                Act) for the eligible educational 
                                institution for such period, or
                                    ``(II) the actual invoice amount 
                                the student residing in housing owned 
                                or operated by the eligible educational 
                                institution is charged by such 
                                institution for room and board costs 
                                for such period.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.
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