REPORT TITLE:
Higher Education


DESCRIPTION:
Creates a college savings program.  (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 1999                                S.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO HIGHER EDUCATION. 


BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Intent and purpose.  It is the intent and
 
 2 purpose of the legislature to establish a qualified state tuition
 
 3 program pursuant to section 529 of the Internal Revenue Code of
 
 4 1986, as amended, or successor legislation, and any regulations
 
 5 promulgated thereunder.
 
 6      SECTION 2.  The Hawaii Revised Statutes is amended by adding
 
 7 a new chapter to be appropriately designated and to read as
 
 8 follows:
 
 9                             "CHAPTER
 
10                      COLLEGE SAVINGS PROGRAM
 
11        -1  Definitions.  As used in this chapter, unless the
 
12 context otherwise requires:
 
13      "Account" or "college account" means an individual savings
 
14 account established in accordance with this chapter.
 
15      "Account owner" means the individual who enters into a
 
16 tuition savings agreement pursuant to this chapter and as defined
 
17 under the final regulations adopted by the Internal Revenue
 
18 Service.
 
19      "Designated beneficiary" means a designated beneficiary as
 

 
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 1 defined in section 529 of the Internal Revenue Code of 1986, as
 
 2 amended, or successor legislation.
 
 3      "Financial organization" means an organization authorized to
 
 4 do business in the State of Hawaii that is:
 
 5      (1)  Certified as an insurer by the insurance commissioner;
 
 6      (2)  Licensed or chartered as a financial institution by the
 
 7           commissioner of financial institutions;
 
 8      (3)  Chartered by an agency of the federal government;
 
 9      (4)  Subject to the jurisdiction and regulation of the
 
10           securities and exchange commission of the federal
 
11           government; or
 
12      (5)  Any other entity otherwise authorized to act in this
 
13           state as a trustee pursuant to the provisions of the
 
14           Employee Retirement Income Security Act of 1974, as may
 
15           be amended from time to time.
 
16      "Institution of higher education" means an institution
 
17 defined in section 529 of the Internal Revenue Code of 1986, as
 
18 amended, or successor legislation.
 
19      "Management contract" means the contract executed by the
 
20 director of finance and a financial organization selected to act
 
21 as a depository and manager of the program.
 
22      "Member of the family" means a family member as defined in
 
23 section 529 of the Internal Revenue Code of 1986, as amended, or
 

 
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 1 successor legislation.
 
 2      "Nonqualified withdrawal" means a withdrawal from an account
 
 3 that is not:
 
 4      (1)  A qualified withdrawal;
 
 5      (2)  A withdrawal made as the result of the death or
 
 6           disability of the designated beneficiary of an account;
 
 7           or
 
 8      (3)  A withdrawal made on the account of a scholarship.
 
 9      "Program" means the college savings program.
 
10      "Program manager" means a financial organization selected by
 
11 the director of finance to act as a depository and manager of the
 
12 program.
 
13      "Qualified higher education expenses" means any qualified
 
14 higher education expense defined in section 529 of the Internal
 
15 Revenue Code of 1986, as amended, or successor legislation.
 
16      "Qualified withdrawal" means withdrawal from an account to
 
17 pay the qualified higher education expenses of the designated
 
18 beneficiary of the account.
 
19      "Tuition savings agreement" means an agreement between the
 
20 director of finance or a financial organization and the account
 
21 owner.
 
22        -2  College savings program established.  There is
 
23 established the college savings program.  The purpose of this
 

 
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 1 program is to enable families to save for college tuition and
 
 2 other expenses through college accounts.  The program shall
 
 3 provide college accounts to:
 
 4      (1)  Enable residents of this State and other states to
 
 5           benefit from the tax incentive provided for qualified
 
 6           state tuition programs under the Internal Revenue Code
 
 7           of 1986, as amended; and
 
 8      (2)  Attract students to public and private colleges and
 
 9           universities within the State.
 
10        -3  Functions and powers of the director of finance.
 
11 (a)  The director of finance shall implement the program under
 
12 the terms and conditions established by this chapter.  The
 
13 director of finance may make changes to the program as required
 
14 for participants to obtain the federal income tax benefits or
 
15 treatment provided by section 529 of the Internal Revenue Code of
 
16 1986, as amended, or successor legislation.
 
17      (b)  The director of finance may implement the program
 
18 through the use of financial organizations as account
 
19 depositories and managers.  Under the program, individuals may
 
20 establish accounts directly with an account depository.
 
21      (c)  The director of finance may solicit proposals from
 
22 financial organizations to act as depositories and managers of
 
23 the program.  Financial organizations submitting proposals shall
 

 
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 1 describe the investment instrument that will be held in accounts.
 
 2 The director of finance shall select as program depositories and
 
 3 managers the financial organizations, from among the bidding
 
 4 financial organizations that demonstrate the most advantageous
 
 5 combination, both to potential program participants and this
 
 6 State, based on the following factors:
 
 7      (1)  The financial stability and integrity of the financial
 
 8           organization;
 
 9      (2)  The safety of the investment instrument being offered;
 
10      (3)  The ability of the investment instrument to track the
 
11           expected increasing costs of higher education;
 
12      (4)  The ability of the financial organization to satisfy
 
13           recordkeeping and reporting requirements;
 
14      (5)  The financial organization's plan for promoting the
 
15           program and the resources it is willing to allocate to
 
16           promote the program;
 
17      (6)  The fees, if any, proposed to be charged to persons for
 
18           opening accounts;
 
19      (7)  The minimum initial deposit and minimum contributions
 
20           that the financial organization will require;
 
21      (8)  The ability of financial organizations to accept
 
22           electronic withdrawals, including payroll deduction
 
23           plans; and
 

 
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 1      (9)  Other benefits to the State or its residents included
 
 2           in the proposal, including fees payable to the State to
 
 3           cover expenses to operate the program.
 
 4      (d)  The director of finance may enter into a contract with
 
 5 a financial organization.  The financial organization shall
 
 6 provide only one type of investment instrument.  The management
 
 7 contract shall include, at a minimum, terms requiring the
 
 8 financial organization to:
 
 9      (1)  Take any action required to keep the program in
 
10           compliance with requirements of section   -4 and to
 
11           manage the program to qualify it as a qualified state
 
12           tuition plan under section 529 of the Internal Revenue
 
13           Code of 1986, as amended, or successor legislation;
 
14      (2)  Keep adequate records of each account, keep each
 
15           account segregated from each other account, and provide
 
16           the director of finance with the information necessary
 
17           to prepare the statements required by section   -4;
 
18      (3)  Compile information contained in statements required to
 
19           be prepared under section   -4 and provide the
 
20           compilations to the director of finance;
 
21      (4)  If there is more than one program manager, provide the
 
22           director of finance with the information necessary to
 
23           determine compliance with section   -4;
 

 
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 1      (5)  Provide the director of finance or designee access to
 
 2           the books and records of the program manager to the
 
 3           extent needed to determine compliance with the
 
 4           contract;
 
 5      (6)  Hold all accounts for the benefit of the account owner;
 
 6      (7)  Be audited at least annually by a firm of certified
 
 7           public accountants selected by the program manager, and
 
 8           provide the results of the audit to the director of
 
 9           finance; and
 
10      (8)  Provide the director of finance with copies of all
 
11           regulatory filings and reports made by it during the
 
12           term of the management contract or while it is holding
 
13           any accounts, other than confidential filings or
 
14           reports that will not become part of the program.  The
 
15           program manager shall make available for review by the
 
16           director of finance, the results of any periodic
 
17           examination of the manager by any state or federal
 
18           banking, insurance, or securities commission, except to
 
19           the extent that the report or reports may not be
 
20           disclosed under applicable law or the rules of the
 
21           commission.
 
22      (e)  The director of finance may select more than one
 
23 financial organization and investment instrument for the program
 

 
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 1 when the Internal Revenue Service has provided guidance that
 
 2 giving a contributor the choice of two or more investment
 
 3 instruments under a state program will not cause the program to
 
 4 fail to qualify for favorable tax treatment under section 529 of
 
 5 the Internal Revenue Code of 1986, as amended, or successor
 
 6 legislation.
 
 7      (f)  The director of finance may require an audit to be
 
 8 conducted of the operations and financial position of the program
 
 9 depository and manager at any time if the director of finance has
 
10 any reason to be concerned about the financial position, the
 
11 recordkeeping practices, or the status of accounts of the program
 
12 depository or manager.
 
13      (g)  During the term of any contract with a program manager,
 
14 the director of finance shall conduct an examination of the
 
15 manager and its handling of accounts.  The examination shall be
 
16 conducted at least biennially if the manager is not otherwise
 
17 subject to periodic examination by the commissioner of financial
 
18 institutions, the Federal Deposit Insurance Corporation, or other
 
19 similar entity.
 
20      (h)  If selection of a financial organization as a program
 
21 manager or depository is not renewed, after the end of the term:
 
22      (1)  Accounts previously established and held in investment
 
23           instruments at the financial organization may be
 

 
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 1           terminated;
 
 2      (2)  Additional contributions may be made to the accounts;
 
 3      (3)  No new accounts may be placed with the financial
 
 4           organization; and
 
 5      (4)  Existing accounts held by the depository shall remain
 
 6           subject to all oversight and reporting requirements
 
 7           established by the director of finance.
 
 8 If the director of finance terminates a financial organization as
 
 9 a program manager or depository, the director of finance shall
 
10 take custody of accounts held by the financial organization and
 
11 shall seek to promptly transfer the accounts to another financial
 
12 organization that is selected as a program manager or depository
 
13 and into investment instruments as similar to the original
 
14 instruments as possible.
 
15      (i)  The director of finance may establish a nominal fee for
 
16 an application for a college account.
 
17      (j)  The director of finance may enter into contracts for
 
18 the services of consultants for rendering professional and
 
19 technical assistance and advice and any other contracts that are
 
20 necessary and proper for the implementation of the program.
 
21      (k)  The director of finance may adopt rules to implement
 
22 the program pursuant to chapter 91.
 
23        -4  Program requirements; college account.(a)  A
 

 
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 1 college account may be opened by any person who desires to save
 
 2 money for the payment of the qualified higher education expenses
 
 3 on behalf of a designated beneficiary.  The person shall be
 
 4 considered the account owner as defined in section   -1.  An
 
 5 application for an account shall be in the form prescribed by the
 
 6 program and shall contain the following:
 
 7      (1)  The name, address, and social security number or
 
 8           employer identification number of the account owner;
 
 9      (2)  The designation of a beneficiary;
 
10      (3)  The name, address, and social security number of the
 
11           designated beneficiary;
 
12      (4)  A certification relating to no excess contributions;
 
13           and
 
14      (5)  Other information as the program may require.
 
15      (b)  Only the account owner may make contributions to the
 
16 account after the account is opened.
 
17      (c)  Contributions to accounts may be made only in cash.
 
18      (d)  An account owner may withdraw all or part of the
 
19 balance from an account on sixty days notice or a shorter period
 
20 as may be authorized under rules governing the program.  The
 
21 rules shall include provisions to generally enable the
 
22 determination of whether a withdrawal is a nonqualified
 
23 withdrawal or a qualified withdrawal.  The rules may require one
 

 
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 1 or more of the following:
 
 2      (1)  An account owner seeking to make a qualified withdrawal
 
 3           shall provide certifications of qualified higher
 
 4           education expenses;
 
 5      (2)  Withdrawals not meeting the requirements of this
 
 6           section shall be treated as nonqualified withdrawals by
 
 7           the program manager, and if the withdrawals are
 
 8           subsequently deemed qualified withdrawals, the account
 
 9           owner shall seek any refund of penalties directly from
 
10           the program.
 
11      (e)  An account owner may change the designated beneficiary
 
12 of an account to an individual who is a member of the family of
 
13 the prior designated beneficiary.  An account owner may transfer
 
14 all or a portion of an account to another college account, the
 
15 designated beneficiary of which is a member of the same family,
 
16 as defined in section 529 of the Internal Revenue Code of 1986,
 
17 as amended, or successor legislation, as the beneficiary of the
 
18 initial account.  Changes in designated beneficiaries and
 
19 transfers under this section shall not be permitted if they
 
20 constitute excess contributions.
 
21      (f)  In the case of any nonqualified withdrawal from an
 
22 account, an amount equal to ten per cent (or that rate imposed
 
23 under final regulations adopted by the Internal Revenue Service)
 

 
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 1 of the portion of the withdrawal constituting income as
 
 2 determined in accordance with the principles of section 529 of
 
 3 the Internal Revenue Code of 1986, as amended, or successor
 
 4 legislation, shall be withheld as a penalty and paid to the
 
 5 college savings program trust fund.
 
 6      (g)  The percentage of the penalty described in subsection
 
 7 (f) may be increased if the director of finance determines that
 
 8 the amount of the penalty must be increased to constitute a
 
 9 greater than de minimis penalty for purposes of qualifying the
 
10 program as a qualified state tuition program under section 529 of
 
11 the Internal Revenue Code of 1986, as amended, or successor
 
12 legislation.
 
13      (h)  The percentage of the penalty described in subsection
 
14 (f) may be decreased by rule if it is determined that:
 
15      (1)  The penalty is greater than the amount required to
 
16           constitute a greater than de minimis penalty for
 
17           purposes of qualifying the program as a qualified state
 
18           tuition program under section 529 of the Internal
 
19           Revenue Code of 1986, as amended, or successor
 
20           legislation; and
 
21      (2)  The penalty, when combined with other revenue generated
 
22           under this chapter, is producing more revenue than is
 
23           required to cover the costs of operating the program
 

 
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 1           and recover any prior costs not previously recovered.
 
 2      (i)  If an account owner makes a nonqualified withdrawal and
 
 3 no penalty amount is withheld pursuant to subsection (f), or the
 
 4 amount withheld was less than the amount required to be withheld
 
 5 under subsection (f) for nonqualified withdrawals, the account
 
 6 owner shall pay the unpaid portion of the penalty to the program.
 
 7 The unpaid portion shall be paid on the date that the account
 
 8 owner files the account owner's state or federal income tax
 
 9 return, whichever is filed earlier, for the taxable year of the
 
10 withdrawal.  If the account owner does not file a return, the
 
11 unpaid portion shall be paid on the date that the earlier return
 
12 is due.  Authorized extensions to filing returns may be taken
 
13 into account in determining the date for paying the unpaid
 
14 portion.
 
15      (j)  The program shall provide separate accounting for each
 
16 designated beneficiary.
 
17      (k)  No account owner or designated beneficiary of any
 
18 account shall be permitted to direct the investment of any
 
19 contributions to an account or the earnings on it.
 
20      (l)  Neither an account owner nor a designated beneficiary
 
21 shall use an interest in an account as security for a loan.  Any
 
22 pledge of an interest in an account shall be of no force and
 
23 effect.
 

 
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 1      (m)  Contributions on behalf of a designated beneficiary in
 
 2 excess of those necessary to provide for the qualified higher
 
 3 education expenses of the designated beneficiary shall not be
 
 4 allowed.  The prohibition on excess contributions shall conform
 
 5 to section 529 of the Internal Revenue Code of 1986, as amended,
 
 6 or successor legislation.
 
 7      (n)  If there is any distribution from an account to any
 
 8 individual or for the benefit of any individual during a calendar
 
 9 year, the distribution shall be reported to the Internal Revenue
 
10 Service and the account owner, the designated beneficiary, or the
 
11 distributee, to the extent required by federal law or regulation.  
 
12      Statements shall be provided to each account owner at least
 
13 once each year within sixty days after the end of the
 
14 twelve-month period to which they relate.  The statement shall
 
15 identify the contributions made during a preceding twelve-month
 
16 period, the total contributions made to the account through the
 
17 end of the period, the value of the account at the end of the
 
18 period, distributions made during the period, and any other
 
19 information that the director of finance requires to be reported
 
20 to the account owner.
 
21      Statements and information relating to accounts shall be
 
22 prepared and filed to the extent required by federal and state
 
23 tax law.
 

 
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 1      (o)  A local government or organization described in section
 
 2 501(c)(3) of the Internal Revenue Code of 1986, as amended, or
 
 3 successor legislation, may open and become the account owner of
 
 4 an account to fund scholarships for persons whose identify shall
 
 5 be determined upon disbursement.  Any account opened pursuant to
 
 6 this subsection is not required to comply with the condition set
 
 7 forth in subsection (a) that a beneficiary be designated when an
 
 8 account is opened, and each individual who receives an interest
 
 9 in the account as a scholarship shall be treated as a designated
 
10 beneficiary.
 
11      (p)  An annual fee may be imposed upon the account owner for
 
12 the maintenance of the account.
 
13      (q)  A qualified withdrawal may be made only after at least
 
14 three calendar years have elapsed from the time an account is
 
15 opened.
 
16      (r)  The program shall disclose in writing the following
 
17 information to each account owner and prospective account owner
 
18 of a college account:
 
19      (1)  The terms and conditions for purchasing a college
 
20           account;
 
21      (2)  Any restrictions on the substitution of beneficiaries;
 
22      (3)  The person or entity entitled to terminate the tuition
 
23           savings agreement;
 

 
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 1      (4)  The period of time during which a beneficiary may
 
 2           receive benefits under the tuition savings agreement;
 
 3      (5)  The terms and conditions under which money may be
 
 4           wholly or partially withdrawn from the program,
 
 5           including any reasonable charges and fees that may be
 
 6           imposed for withdrawal; and
 
 7      (6)  The probable tax consequences associated with
 
 8           contributions to and distributions from accounts.
 
 9        -5  Program limitations; college account.(a) Nothing
 
10 in this chapter shall be construed to:
 
11      (1)  Give any designated beneficiary any rights or legal
 
12           interest with respect to an account;
 
13      (2)  Guarantee that a designated beneficiary:
 
14           (A)  Will be admitted to an institution of higher
 
15                education; or
 
16           (B)  Upon admission to an institution of higher
 
17                education, will be permitted to continue to attend
 
18                or will receive a degree from the institution;
 
19      (3)  Create state residency for an individual merely because
 
20           the individual is a designated beneficiary; or
 
21      (4)  Guarantee that amounts saved pursuant to the program
 
22           will be sufficient to cover the qualified higher
 
23           education expenses of a designated beneficiary.
 

 
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 1      (b)  Nothing in this chapter shall create or be construed to
 
 2 create any obligation of the director of finance, the State, or
 
 3 any agency or instrumentality of the State to guarantee for the
 
 4 benefit of any account owner or designated beneficiary with
 
 5 respect to:
 
 6      (1)  The rate of interest or other return on any account; or
 
 7      (2)  The payment of interest or other return on any account.
 
 8 The director of finance shall provide by rule that every
 
 9 contract, application, deposit slip, or other similar document
 
10 that may be used in connection with a contribution to an account
 
11 clearly indicate that the account is not insured by the State and
 
12 neither the principal deposited nor the investment return is
 
13 guaranteed by the State.
 
14        -6  College savings program trust fund.(a)  There is
 
15 established the college savings program trust fund.  The director
 
16 of finance shall have custody of the fund.  All payments from the
 
17 fund shall be made in accordance with this chapter.
 
18      (b)  The fund shall consist of a trust account and an
 
19 operating account.  The trust account shall include amounts
 
20 received by the college savings program pursuant to tuition
 
21 savings agreements, administrative charges, fees, and all other
 
22 amounts received by the program from other sources, and interest
 
23 and investment income earned by the fund.  The director of
 

 
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 1 finance, from time to time, shall make transfers from the trust
 
 2 account to the operating account for the immediate payment of
 
 3 obligations under tuition savings agreements, operating expenses,
 
 4 and administrative costs of the college savings program.
 
 5 Administrative costs shall be paid out of the operating account.
 
 6      (c)  The director of finance, as trustee, shall invest the
 
 7 assets of the fund in securities that constitute legal
 
 8 investments under State laws relating to the investment of trust
 
 9 fund assets by trust companies, including those authorized by
 
10 article 8 of chapter 412.  Fund assets shall be kept separate and
 
11 shall not be commingled with other assets, except as provided in
 
12 this chapter.  The director of finance may enter into contracts
 
13 to provide for investment advice and management, custodial
 
14 services, and other professional services for the administration
 
15 and investment of the program.  Administrative fees, costs, and
 
16 expenses, including investment fees and expenses, shall be paid
 
17 from the assets of the fund.
 
18      (d)  The director of finance shall provide for the
 
19 administration of the fund, including maintaining participant
 
20 records and accounts, and providing annual audited reports.  The
 
21 director of finance may enter into contracts for administrative
 
22 services, including reports.
 
23        -7  Tax reporting.  The director of finance or the
 

 
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 1 program manager of the college savings program, or a designee,
 
 2 shall file a report annually, with the director of taxation,
 
 3 setting forth the names and identification numbers of account
 
 4 owners, designated beneficiaries, and distributees of college
 
 5 accounts, the amounts contributed to the accounts, the amounts
 
 6 distributed from the accounts, and the nature of the
 
 7 distributions as qualified withdrawals or as withdrawals other
 
 8 than qualified withdrawals, and any other information that the
 
 9 director of taxation may require regarding the taxation under
 
10 this chapter of amounts contributed to or withdrawn from the
 
11 accounts."
 
12      SECTION 3.  Chapter 654, Hawaii Revised Statutes, is amended
 
13 by adding a new section to be appropriately designated and to
 
14 read as follows:
 
15      "654-    College savings program.  (a) Moneys in an account
 
16 created pursuant to chapter     are exempt from application to
 
17 the satisfaction of a money judgment as follows:
 
18      (1)              per cent of moneys in an account
 
19           established in connection with a scholarship program;
 
20      (2)              per cent of moneys in an account where the
 
21           judgment debtor is the account owner and the designated
 
22           beneficiary of the account is a minor; and
 
23      (3)  An amount not exceeding $         in an account, or in
 

 
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 1           the aggregate for more than one account, where the
 
 2           judgment debtor is the account owner of the account or
 
 3           accounts.
 
 4      (b) For the purposes of this section, the terms "account
 
 5 owner" and "designated beneficiary" shall have the meanings
 
 6 ascribed to them in section   -1."
 
 7      SECTION 4.  Statutory material to be repealed is bracketed.
 
 8 New statutory material is underscored.
 
 9      SECTION 5.  This Act, upon its approval, shall apply to
 
10 taxable years beginning after December 31, 1999.