REPORT TITLE:
College Savings Program



DESCRIPTION:
Defines "eligible educational institution" in college savings
program in taxation code; allows the Director of Finance to enter
into tuition agreements with account owners; allows distributions
from account after a minimum length of time as determined by the
Director of Finance; clarifies withdrawals. (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2760
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 2000                                S.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE COLLEGE SAVINGS PROGRAM.



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

 1      SECTION 1.  Section 256-1, Hawaii Revised Statutes, is
 
 2 amended as follows:
 
 3      (1)  By adding a new definition to be appropriately inserted
 
 4 and to read as follows:
 
 5      ""Eligible educational institution" means an institution
 
 6 defined in section 529 of the Internal Revenue Code of 1986, as
 
 7 amended, or successor legislation."
 
 8      (2)  By amending the definitions of "account owner" and
 
 9 "nonqualified withdrawal" to read as follows:
 
10      ""Account owner" means the individual who enters into a
 
11 tuition savings agreement pursuant to this chapter and as defined
 
12 under the [final regulations adopted by the Internal Revenue
 
13 Service.] proposed income tax regulations, sections 1.529-1 to
 
14 1.529-6 or the final regulations relating to section 529 of the
 
15 Internal Revenue Code of 1986, as amended, whichever is
 
16 applicable, including any amendments or supplements thereto.
 
17      "Nonqualified withdrawal" means a withdrawal from an account
 
18 that is not:
 
19      (1)  [A qualified withdrawal;] Used for qualified higher
 

 
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 1           education expenses of the designated beneficiary;
 
 2      (2)  [A withdrawal made as the result] Made on account of
 
 3           the death or disability of the designated beneficiary
 
 4           [of an account]; or
 
 5      (3)  [A withdrawal made] Made on the account of a
 
 6           scholarship[.] (or allowance or payment described in
 
 7           section 135(d)(1)(B) or (C) of the Internal Revenue
 
 8           Code of 1986, as amended) received by the designated
 
 9           beneficiary, to the extent the withdrawal does not
 
10           exceed the amount of the scholarship, allowance, or
 
11           payment."
 
12      (3)  By deleting the definition "institution of higher
 
13 education".
 
14      [""Institution of higher education" means an institution
 
15 defined in section 529 of the Internal Revenue Code of 1986, as
 
16 amended, or successor legislation."]
 
17      SECTION 2.  Section 256-3, Hawaii Revised Statutes, is
 
18 amended to read as follows:
 
19      "[[]256-3[]]  Functions and powers of the director of
 
20 finance.(a)  The director of finance shall implement the
 
21 program under the terms and conditions established by this
 
22 chapter.  The director of finance may make changes to the program
 
23 as required for participants to obtain or maintain the federal
 

 
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 1 [income] tax benefits or treatment provided by section 529 of the
 
 2 Internal Revenue Code of 1986, as amended, or successor
 
 3 legislation.
 
 4      (b)  The director of finance may enter into tuition savings
 
 5 agreements with account owners pursuant to this chapter.
 
 6      [(b)] (c)  The director of finance may implement the program
 
 7 through the use of financial organizations as account
 
 8 depositories and managers.  Under the program, individuals may
 
 9 establish accounts directly with an account depository.
 
10      [(c)] (d)  The director of finance may solicit proposals
 
11 from financial organizations to act as [depositories and managers
 
12 of the] program[.] managers.  Financial organizations submitting
 
13 proposals shall describe the investment [instrument] instruments
 
14 that will be held in accounts.  The director of finance shall
 
15 select as program [depositories and] managers the financial
 
16 organizations[,] from among the bidding financial organizations
 
17 that demonstrate the most advantageous combination, both to
 
18 potential program participants and this State, based on the
 
19 following factors:
 
20      (1)  The financial stability and integrity of the financial
 
21           organization;
 
22      (2)  The safety of the investment [instrument] instruments
 
23           being offered;
 

 
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 1      (3)  The ability of the investment [instrument] instruments
 
 2           to track the expected increasing costs of higher
 
 3           education;
 
 4      (4)  The ability of the financial organization to satisfy
 
 5           recordkeeping and reporting requirements;
 
 6      (5)  The financial organization's plan for promoting the
 
 7           program and the resources it is willing to allocate to
 
 8           promote the program;
 
 9      (6)  The fees, if any, proposed to be charged to persons for
 
10           opening accounts;
 
11      (7)  The minimum initial deposit and minimum contributions
 
12           that the financial organization will require;
 
13      (8)  The ability of financial organizations to accept
 
14           electronic withdrawals, including payroll deduction
 
15           plans; and
 
16      (9)  Other benefits to the State or its residents included
 
17           in the proposal, including fees payable to the State to
 
18           cover expenses to operate the program.
 
19      [(d)] (e)  The director of finance may enter into a
 
20 management contract of up to ten years with a financial
 
21 organization.  [The financial organization shall provide only one
 
22 type of investment instrument.]  The management contract shall
 
23 include, at a minimum, terms requiring the financial organization
 

 
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 1 to:
 
 2      (1)  Take any action required to keep the program in
 
 3           compliance with requirements of section 256-4 and to
 
 4           manage the program to qualify it as a qualified state
 
 5           tuition plan under section 529 of the Internal Revenue
 
 6           Code of 1986, as amended, or successor legislation;
 
 7      (2)  Keep adequate records of each account, keep each
 
 8           account segregated from each other account, and provide
 
 9           the director of finance with the information necessary
 
10           to prepare the statements required by section 256-4;
 
11      (3)  Compile information contained in statements required to
 
12           be prepared under section 256-4 and provide the
 
13           compilations to the director of finance;
 
14      (4)  If there is more than one program manager, provide the
 
15           director of finance with the information necessary to
 
16           determine compliance with section 256-4;
 
17      (5)  Provide the director of finance or designee access to
 
18           the books and records of the program manager to the
 
19           extent needed to determine compliance with the
 
20           contract;
 
21      (6)  Hold all accounts for the benefit of the account owner;
 
22      (7)  Be audited at least annually by a firm of independent
 
23           certified public accountants selected by the program
 

 
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 1           manager, and provide the results of the audit to the
 
 2           director of finance; [and]
 
 3      (8)  Provide the director of finance with copies of all
 
 4           regulatory filings and reports related to the program
 
 5           made by it during the term of the management contract
 
 6           or while it is holding any accounts, other than
 
 7           confidential filings or reports that will not become
 
 8           part of the program.  The program manager shall make
 
 9           available for review by the director of finance, the
 
10           results of any periodic examination of the manager by
 
11           any state or federal banking, insurance, or securities
 
12           commission, except to the extent that the report or
 
13           reports may not be disclosed under applicable law or
 
14           the rules of the commission[.]; and
 
15      (9)  Undertake to provide the information required by rule
 
16           15c2-12(b)(5) under the Securities Exchange Act of 1934
 
17           pursuant to a continuing disclosure certificate for the
 
18           benefit of the account owners.
 
19      [(e)] (f)  The director of finance may select more than one
 
20 financial organization and investment instrument for the program
 
21 [when the Internal Revenue Services has provided guidance that
 
22 giving a contributor the choice of two or more investment
 
23 instruments under a state program will not cause the program to
 

 
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 1 fail to qualify for favorable tax treatment under section 529 of
 
 2 the Internal Revenue Code of 1986, as amended, or successor
 
 3 legislation].
 
 4      [(f)] (g)  The director of finance may require an audit to
 
 5 be conducted of the operations and financial position of the
 
 6 program [depository and] manager at any time if the director of
 
 7 finance has any reason to be concerned about the financial
 
 8 position, the recordkeeping practices, or the status of accounts
 
 9 of the program [depository or] manager.
 
10      [(g)] (h)  During the term of any contract with a program
 
11 manager, the director of finance shall conduct an examination of
 
12 the manager and its handling of accounts.  The examination shall
 
13 be conducted at least biennially if the manager is not otherwise
 
14 subject to periodic examination by the commissioner of financial
 
15 institutions, the Federal Deposit Insurance Corporation, or other
 
16 similar entity.
 
17      [(h)  If selection of a financial organization as a program
 
18 manager or depository is not renewed, after the end of the term:
 
19      (1)  Accounts previously established and held in investment
 
20           instruments at the financial organization may be
 
21           terminated;
 
22      (2)  Additional contributions may be made to the accounts;
 
23      (3)  No new accounts may be placed with the financial
 

 
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 1           organization; and
 
 2      (4)  Existing accounts held by the depository shall remain
 
 3           subject to all oversight and reporting requirements
 
 4           established by the director of finance.
 
 5 If the director of finance terminates a financial organization as
 
 6 a program manager or depository, the director of finance shall
 
 7 take custody of accounts held by the financial organization and
 
 8 shall seek to promptly transfer the accounts to another financial
 
 9 organization that is selected as a program manager or depository
 
10 and into investment instruments as similar to the original
 
11 instruments as possible.]
 
12      (i)  The director of finance may establish a nominal fee for
 
13 an application for a college account.
 
14      (j)  The director of finance may enter into contracts for
 
15 the services of consultants for rendering professional and
 
16 technical assistance and advice and any other contracts that are
 
17 necessary and proper for the implementation of the program.
 
18      (k)  The director of finance may adopt rules to implement
 
19 the program pursuant to chapter 91."
 
20      SECTION 3.  Section 256-4, Hawaii Revised Statutes, is
 
21 amended to read as follows:
 
22      "[[]256-4[]]  Program requirements; college account.(a)
 
23 A college account may be opened by any person who desires to save
 

 
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                                     H.B. NO.           H.D. 2
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 1 money for the payment of the qualified higher education expenses
 
 2 on behalf of a designated beneficiary.  The person shall be
 
 3 considered the account owner as defined in section 256-1.  An
 
 4 application for an account shall be in the form prescribed by the
 
 5 program and shall contain the following:
 
 6      (1)  The name, address, and social security number or
 
 7           employer identification number of the account owner;
 
 8      (2)  The designation of a beneficiary;
 
 9      (3)  The name, address, and social security number of the
 
10           designated beneficiary;
 
11      (4)  A certification relating to no excess contributions;
 
12           and
 
13      (5)  Other information as the program may require.
 
14      (b)  Only the account owner may make contributions to the
 
15 account after the account is opened.
 
16      (c)  Contributions to accounts may be made only in cash.
 
17      (d)  An account owner may withdraw all or part of the
 
18 balance from an account on sixty days' notice or a shorter period
 
19 as may be authorized under rules governing the program.  The
 
20 rules shall include provisions to generally enable the
 
21 determination of whether a withdrawal is a nonqualified
 
22 withdrawal or a qualified withdrawal.  The rules may require one
 
23 or more of the following:
 

 
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                                     H.B. NO.           H.D. 2
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 1      (1)  An account owner seeking to make a qualified withdrawal
 
 2           shall provide certifications of qualified higher
 
 3           education expenses and other information required to
 
 4           comply with section 529 of the Internal Revenue Code of
 
 5           1986, as amended, or successor legislation;
 
 6      (2)  Withdrawals not meeting the requirements of this
 
 7           section shall be treated as nonqualified withdrawals by
 
 8           the program manager, and if the withdrawals are
 
 9           subsequently deemed qualified withdrawals within a
 
10           reasonable time period as specified by the director of
 
11           finance, the account owner shall seek any refund of
 
12           penalties directly from the program.
 
13      (e)  An account owner may change the designated beneficiary
 
14 of an account to an individual who is a member of the family of
 
15 the prior designated beneficiary.  An account owner may transfer
 
16 all or a portion of an account to another college account, the
 
17 designated beneficiary of which is a member of the same family,
 
18 as defined in section 529 of the Internal Revenue Code of 1986,
 
19 as amended, or successor legislation, as the beneficiary of the
 
20 initial account.  Changes in designated beneficiaries and
 
21 transfers under this section shall not be permitted if they
 
22 constitute excess contributions.
 
23      (f)  In the case of any nonqualified withdrawal from an
 

 
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 1 account, an amount equal to ten per cent (or that rate imposed
 
 2 under final regulations adopted by the Internal Revenue Service)
 
 3 of the portion of the withdrawal constituting income as
 
 4 determined in accordance with the principles of section 529 of
 
 5 the Internal Revenue Code of 1986, as amended, or successor
 
 6 legislation, shall be [withheld] collected as a penalty and paid
 
 7 to the college savings program trust fund[.], as provided under
 
 8 section 529 of the Internal Revenue Code of 1986, as amended,
 
 9 successor legislation, or any guidance issued by the Internal
 
10 Revenue Service.
 
11      (g)  The percentage of the penalty described in subsection
 
12 (f) may be increased if the director of finance determines that
 
13 the amount of the penalty must be increased to constitute a
 
14 greater than de minimis penalty for purposes of qualifying the
 
15 program as a qualified state tuition program under section 529 of
 
16 the Internal Revenue Code of 1986, as amended, or successor
 
17 legislation.
 
18      (h)  The percentage of the penalty described in subsection
 
19 (f) may be decreased by rule if it is determined [that:
 
20      (1)  The] the penalty is greater than the amount required to
 
21           constitute a greater than de minimis penalty for
 
22           purposes of qualifying the program as a qualified state
 
23           tuition program under section 529 of the Internal
 

 
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 1           Revenue Code of 1986, as amended, or successor
 
 2           legislation[; and
 
 3      (2)  The penalty, when combined with other revenue generated
 
 4           under this chapter, is producing more revenue than is
 
 5           required to cover the costs of operating the program
 
 6           and recover any prior costs not previously recovered].
 
 7      [(i) If an account owner makes a nonqualified withdrawal and
 
 8 no penalty amount is withheld pursuant to subsection (f), or the
 
 9 amount withheld was less than the amount required to be withheld
 
10 under subsection (f) for nonqualified withdrawals, the account
 
11 owner shall pay the unpaid portion of the penalty to the program.
 
12 The unpaid portion shall be paid on the date that the account
 
13 owner files the account owner's state or federal income tax
 
14 return, whichever is filed earlier, for the taxable year of the
 
15 withdrawal.  If the account owner does not file a return, the
 
16 unpaid portion shall be paid on the date that the earlier return
 
17 is due.  Authorized extensions to filing returns may be taken
 
18 into account in determining the date for paying the unpaid
 
19 portion.
 
20      (j)] (i)  The program shall provide separate accounting for
 
21 each designated beneficiary.
 
22      [(k)] (j)  No account owner or designated beneficiary of any
 
23 account shall be permitted to direct the investment of any
 

 
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 1 contributions to an account or the earnings on it.
 
 2      [(l)] (k)  Neither an account owner nor a designated
 
 3 beneficiary shall use an interest in an account as security for a
 
 4 loan.  Any pledge of an interest in an account shall be of no
 
 5 force and effect.
 
 6      [(m)] (l)  Contributions on behalf of a designated
 
 7 beneficiary in excess of those necessary to provide for the
 
 8 qualified higher education expenses of the designated beneficiary
 
 9 shall not be allowed.  The prohibition on excess contributions
 
10 shall conform to section 529 of the Internal Revenue Code of
 
11 1986, as amended, or successor legislation.
 
12      [(n)] (m)  If there is any distribution from an account to
 
13 any individual or for the benefit of any individual during a
 
14 calendar year, the distribution shall be reported to the Internal
 
15 Revenue Service and the account owner, the designated
 
16 beneficiary, or the distributee, to the extent required by
 
17 federal law or regulation.  
 
18      Statements shall be provided to each account owner at least
 
19 once each year within sixty days after the end of the
 
20 twelve-month period to which they relate.  The statement shall
 
21 identify the contributions made during a preceding twelve-month
 
22 period, the total contributions made to the account through the
 
23 end of the period, the value of the account at the end of the
 

 
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 1 period, distributions made during the period, and any other
 
 2 information that the director of finance requires to be reported
 
 3 to the account owner.
 
 4      Statements and information relating to accounts shall be
 
 5 prepared and filed to the extent required by federal and state
 
 6 tax law.
 
 7      [(o)] (n)  A local government or organization described in
 
 8 section 501(c)(3) of the Internal Revenue Code of 1986, as
 
 9 amended, or successor legislation, may open and become the
 
10 account owner of an account to fund scholarships for persons
 
11 whose [[]identity[]] shall be determined upon disbursement.  Any
 
12 account opened pursuant to this subsection is not required to
 
13 comply with the condition set forth in subsection (a) that a
 
14 beneficiary be designated when an account is opened, and each
 
15 individual who receives an interest in the account as a
 
16 scholarship shall be treated as a designated beneficiary.
 
17      [(p)] (o)  An annual fee may be imposed upon the account
 
18 owner for the maintenance of the account.
 
19      [(q)  A qualified withdrawal may be made only after at least
 
20 three calendar years have elapsed from the time an account is
 
21 opened.] (p)  A minimum length of time as determined by the
 
22 director of finance may be required of the account before
 
23 distributions for qualified higher education can be made.
 

 
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                                     H.B. NO.           H.D. 2
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 1      [(r)] (q)  The program shall disclose in writing the
 
 2 following information to each account owner and prospective
 
 3 account owner of a college account:
 
 4      (1)  The terms and conditions for purchasing a college
 
 5           account;
 
 6      (2)  Any restrictions on the substitution of beneficiaries;
 
 7      (3)  The person or entity entitled to terminate the tuition
 
 8           savings agreement;
 
 9      (4)  The period of time during which a beneficiary may
 
10           receive benefits under the tuition savings agreement;
 
11      (5)  The terms and conditions under which money may be
 
12           wholly or partially withdrawn from the program,
 
13           including any reasonable charges and fees that may be
 
14           imposed for withdrawal; and
 
15      (6)  The probable tax consequences associated with
 
16           contributions to and distributions from accounts."
 
17      SECTION 4.  Section 256-5, Hawaii Revised Statutes, is
 
18 amended by amending subsection (b) to read as follows:
 
19      "(b)  Nothing in this chapter shall create or be construed
 
20 to create any obligation of the director of finance, the State,
 
21 or any agency or instrumentality of the State to guarantee for
 
22 the benefit of any account owner or designated beneficiary with
 
23 respect to:
 

 
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                                     H.B. NO.           H.D. 2
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 1      (1)  The rate of interest or other return on any account;
 
 2           [or]
 
 3      (2)  The payment of interest or other return on any
 
 4           account[.]; or
 
 5      (3)  The repayment of the principal of any account.
 
 6 The director of finance shall provide by rule that every tuition
 
 7 savings agreement, contract, application, deposit slip, or other
 
 8 similar document that may be used in connection with a
 
 9 contribution to an account clearly indicate that the account is
 
10 not insured by the State and neither the principal deposited nor
 
11 the investment return is guaranteed by the State."
 
12      SECTION 5.  Section 256-6, Hawaii Revised Statutes, is
 
13 amended to read as follows:
 
14      "[[]256-6[]]  College savings program trust fund.(a)
 
15 There is established the college savings program trust fund.  The
 
16 director of finance shall have custody of the fund.  All payments
 
17 from the 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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                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        


 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
 
 6 account.]
 
 7      (c)  The director of finance, as trustee, shall invest the
 
 8 assets of the fund in securities that constitute legal
 
 9 investments under state laws relating to the investment of trust
 
10 fund assets by trust companies, including those authorized by
 
11 article 8 of chapter 412.  Trust fund assets shall be kept
 
12 separate and shall not be commingled with other assets, except as
 
13 provided in this chapter.  The director of finance may enter into
 
14 contracts to provide for investment advice and management,
 
15 custodial services, and other professional services for the
 
16 administration and investment of the program.  [Administrative
 
17 fees, costs, and expenses, including investment fees and
 
18 expenses, shall be paid from the assets of the fund.]
 
19      (d)  The director of finance shall provide for the
 
20 administration of the fund, including maintaining participant
 
21 records and accounts, and providing annual audited reports.  The
 
22 director of finance may enter into contracts for administrative
 
23 services, including reports.
 

 
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 1      (e)  All administrative fees, costs, and expenses, including
 
 2 investment fees and expenses, shall be paid from the operating
 
 3 account of the fund and, notwithstanding any other law to the
 
 4 contrary, may be made without appropriation or allotment."
 
 5      SECTION 6.  Statutory material to be repealed is bracketed.
 
 6 New statutory material is underscored.
 
 7      SECTION 7.  This Act shall take effect upon its approval.