REPORT TITLE:
College Savings


DESCRIPTION:
Allows the tax deduction of contributions made to a college
savings program under chapter 256, HRS and amends chapter 256 to
provide clear guidance for the implementation of the college
savings program.  (HB2760 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2760
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 2000                                
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 235-7, Hawaii Revised Statutes, is
 
 2 amended as follows:
 
 3      1.  By amending subsection (a) to read:
 
 4      "(a)  There shall be excluded from gross income, adjusted
 
 5 gross income, and taxable income:
 
 6      (1)  Income not subject to taxation by the State under the
 
 7           Constitution and laws of the United States;
 
 8      (2)  Rights, benefits, and other income exempted from
 
 9           taxation by section 88-91, having to do with the state
 
10           retirement system, and the rights, benefits, and other
 
11           income, comparable to the rights, benefits, and other
 
12           income exempted by section 88-91, under any other
 
13           public retirement system;
 
14      (3)  Any compensation received in the form of a pension for
 
15           past services;
 
16      (4)  Compensation paid to a patient affected with Hansen's
 
17           disease employed by the State or the United States in
 
18           any hospital, settlement, or place for the treatment of
 
19           Hansen's disease;
 

 
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 1      (5)  Except as otherwise expressly provided, payments made
 
 2           by the United States or this State, under an act of
 
 3           Congress or a law of this State, which by express
 
 4           provision or administrative regulation or
 
 5           interpretation are exempt from both the normal and
 
 6           surtaxes of the United States, even though not so
 
 7           exempted by the Internal Revenue Code itself;
 
 8      (6)  Any income expressly exempted or excluded from the
 
 9           measure of the tax imposed by this chapter by any other
 
10           law of the State, it being the intent of this chapter
 
11           not to repeal or supersede any such express exemption
 
12           or exclusion;
 
13      (7)  The first $1,750 received by each member of the reserve
 
14           components of the Army, Navy, Air Force, Marine Corps,
 
15           or Coast Guard of the United States of America, and the
 
16           Hawaii national guard as compensation for performance
 
17           of duty;
 
18      (8)  Income derived from the operation of ships or aircraft
 
19           if the income is exempt under the Internal Revenue Code
 
20           pursuant to the provisions of an income tax treaty or
 
21           agreement entered into by and between the United States
 
22           and a foreign country, provided that the tax laws of
 
23           the local governments of that country reciprocally
 

 
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 1           exempt from the application of all of their net income
 
 2           taxes, the income derived from the operation of ships
 
 3           or aircraft which are documented or registered under
 
 4           the laws of the United States;
 
 5      (9)  The value of legal services provided by a prepaid legal
 
 6           service plan to a taxpayer, the taxpayer's spouse, and
 
 7           the taxpayer's dependents;
 
 8     (10)  Amounts paid, directly or indirectly, by a prepaid
 
 9           legal service plan to a taxpayer as payment or
 
10           reimbursement for the provision of legal services to
 
11           the taxpayer, the taxpayer's spouse, and the taxpayer's
 
12           dependents;
 
13     (11)  Contributions by an employer to a prepaid legal service
 
14           plan for compensation (through insurance or otherwise)
 
15           to the employer's employees for the costs of legal
 
16           services incurred by the employer's employees, their
 
17           spouses, and their dependents; [and]
 
18     (12)  Amounts received in the form of a monthly surcharge by
 
19           a utility acting on behalf of an affected utility under
 
20           section 269-16.3 shall not be gross income, adjusted
 
21           gross income, or taxable income for the acting utility
 
22           under this chapter.  Any amounts retained by the acting
 
23           utility for collection or other costs shall not be
 
24           included in this exemption[.]; and
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1     (13)  Qualified withdrawals (as defined under 256-1) from a
 
 2           college savings account under section 256-2."
 
 3      2.  By amending subsection (g) to read:
 
 4      "(g)  In computing taxable income there shall be allowed as
 
 5 a deduction:
 
 6      (1)  Political contributions by any taxpayer not in excess
 
 7           of $250 in any year; provided that such contributions
 
 8           are made to a central or county committee of a
 
 9           political party whose candidates shall have qualified
 
10           by law to be voted for at the immediately previous
 
11           general election; [or]
 
12      (2)  Political contributions by any individual taxpayer in
 
13           an aggregate amount not to exceed $1,000 in any year;
 
14           provided that such contributions are made to candidates
 
15           as defined in section 11-191, who have agreed to abide
 
16           by the campaign expenditure limits as set forth in
 
17           section 11-209; and provided further that not more than
 
18           $250 of an individual's total contribution to any
 
19           single candidate shall be deductible for purposes of
 
20           this section[.]; or
 
21      (3)  Contributions made to a college savings account under
 
22           chapter 256; provided that the deduction shall not
 
23           exceed $5,000 and $10,000 for individual and joint tax
 
24           filers, respectively, for any given year."
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      SECTION 2.  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:
 
 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:
 
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
 
14 through 1.529-6 or the final regulations relating to section 529
 
15 of the 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
 
20           education expenses of the designated beneficiary;
 
21      (2)  [A withdrawal made as the result] Made on account of
 
22           the death or disability of the designated beneficiary
 
23           [of an account]; or
 

 
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 1      (3)  [A withdrawal made] Made on the account of a
 
 2           scholarship[.] (or allowance or payment described in
 
 3           section 135(d)(1)(B) or (C) of the Internal Revenue
 
 4           Code of 1986, as amended) received by the designated
 
 5           beneficiary, to the extent the withdrawal does not
 
 6           exceed the amount of the scholarship, allowance, or
 
 7           payment."
 
 8      (3)  By deleting the definition "institution of higher
 
 9 education".
 
10      [""Institution of higher education" means an institution
 
11 defined in section 529 of the Internal Revenue Code of 1986, as
 
12 amended, or successor legislation."]
 
13      SECTION 3.  Section 256-2, Hawaii Revised Statutes, is
 
14 amended to read as follows:
 
15      "[[]256-2[]]  College savings program established.  (a)
 
16 There is established the college savings program.  The purpose of
 
17 this program is to enable families to save for college tuition
 
18 and other expenses through college accounts.  The program shall
 
19 provide college accounts to:
 
20      (1)  Enable residents of this State and other states to
 
21           benefit from the tax incentive provided for qualified
 
22           state tuition programs under the Internal Revenue Code
 
23           of 1986, as amended;
 

 
Page 7                                                     2760
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 1      (2)  Attract students to public and private colleges and
 
 2           universities within the State.
 
 3      (b)  Contributions shall not exceed $5,000 and $10,000 for
 
 4 individual and joint tax filers, respectively, and qualified
 
 5 withdrawals shall be excluded from gross income, adjusted income,
 
 6 and taxable income for tax purposes under section 235-7."
 
 7      SECTION 4.  Section 256-3, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "256-3  Functions and powers of the director of finance.
 
10 (a)  The director of finance shall implement the program under
 
11 the terms and conditions established by this chapter.  The
 
12 director of finance may make changes to the program as required
 
13 for participants to obtain or maintain the federal [income] tax
 
14 benefits or treatment provided by section 529 of the Internal
 
15 Revenue Code of 1986, as amended, or successor legislation.
 
16      (b)  The director of finance may enter into tuition savings
 
17 agreements with account owners pursuant to this chapter.
 
18     [(b)] (c)  The director of finance may implement the program
 
19 through the use of financial organizations as account
 
20 depositories and managers.  Under the program, individuals may
 
21 establish accounts directly with an account depository.
 
22     [(c)] (d)  The director of finance may solicit proposals from
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

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

 
Page 9                                                     2760
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (7)  The minimum initial deposit and minimum contributions
 
 2           that the financial organization will require;
 
 3      (8)  The ability of financial organizations to accept
 
 4           electronic withdrawals, including payroll deduction
 
 5           plans; and
 
 6      (9)  Other benefits to the State or its residents included
 
 7           in the proposal, including fees payable to the State to
 
 8           cover expenses to operate the program.
 
 9     [(d)] (e)  The director of finance may enter into a
 
10 management contract of up to ten years with a financial
 
11 organization.  [The financial organization shall provide only one
 
12 type of investment instrument.]  The management contract shall
 
13 include, at a minimum, terms requiring the financial organization
 
14 to:
 
15      (1)  Take any action required to keep the program in
 
16           compliance with requirements of section 256-4 and to
 
17           manage the program to qualify it as a qualified state
 
18           tuition plan under section 529 of the Internal Revenue
 
19           Code of 1986, as amended, or successor legislation;
 
20      (2)  Keep adequate records of each account, keep each
 
21           account segregated from each other account, and provide
 
22           the director of finance with the information necessary
 
23           to prepare the statements required by section 256-4;
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (3)  Compile information contained in statements required to
 
 2           be prepared under section 256-4 and provide the
 
 3           compilations to the director of finance;
 
 4      (4)  If there is more than one program manager, provide the
 
 5           director of finance with the information necessary to
 
 6           determine compliance with section 256-4;
 
 7      (5)  Provide the director of finance or designee access to
 
 8           the books and records of the program manager to the
 
 9           extent needed to determine compliance with the
 
10           contract;
 
11      (6)  Hold all accounts for the benefit of the account owner;
 
12      (7)  Be audited at least annually by a firm of independent
 
13           certified public accountants selected by the program
 
14           manager, and provide the results of the audit to the
 
15           director of finance; [and]
 
16      (8)  Provide the director of finance with copies of all
 
17           regulatory filings and reports related to the program
 
18           made by it during the term of the management contract
 
19           or while it is holding any accounts, other than
 
20           confidential filings or reports that will not become
 
21           part of the program.  The program manager shall make
 
22           available for review by the director of finance, the
 
23           results of any periodic examination of the manager by
 

 
Page 11                                                    2760
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1           any state or federal banking, insurance, or securities
 
 2           commission, except to the extent that the report or
 
 3           reports may not be disclosed under applicable law or
 
 4           the rules of the commission[.]; and
 
 5      (9)  Undertake to provide the information required by rule
 
 6           15c2-12(b)(5) under the Securities Exchange Act of 1934
 
 7           pursuant to a continuing disclosure certificate for the
 
 8           benefit of the account owners.
 
 9     [(e)] (f)  The director of finance may select more than one
 
10 financial organization and investment instrument for the program
 
11 [when the Internal Revenue Services has provided guidance that
 
12 giving a contributor the choice of two or more investment
 
13 instruments under a state program will not cause the program to
 
14 fail to qualify for favorable tax treatment under section 529 of
 
15 the Internal Revenue Code of 1986, as amended, or successor
 
16 legislation].
 
17     [(f)] (g)  The director of finance may require an audit to be
 
18 conducted of the operations and financial position of the program
 
19 [depository and] manager at any time if the director of finance
 
20 has any reason to be concerned about the financial position, the
 
21 recordkeeping practices, or the status of accounts of the program
 
22 [depository or] manager.
 

 
 
 
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 1      [(g)] (h)  During the term of any contract with a program
 
 2 manager, the director of finance shall conduct an examination of
 
 3 the manager and its handling of accounts.  The examination shall
 
 4 be conducted at least biennially if the manager is not otherwise
 
 5 subject to periodic examination by the commissioner of financial
 
 6 institutions, the Federal Deposit Insurance Corporation, or other
 
 7 similar entity.
 
 8      [(h)  If selection of a financial organization as a program
 
 9 manager or depository is not renewed, after the end of the term:
 
10      (1)  Accounts previously established and held in investment
 
11           instruments at the financial organization may be
 
12           terminated;
 
13      (2)  Additional contributions may be made to the accounts;
 
14      (3)  No new accounts may be placed with the financial
 
15           organization; and
 
16      (4)  Existing accounts held by the depository shall remain
 
17           subject to all oversight and reporting requirements
 
18           established by the director of finance.
 
19 If the director of finance terminates a financial organization as
 
20 a program manager or depository, the director of finance shall
 
21 take custody of accounts held by the financial organization and
 
22 shall seek to promptly transfer the accounts to another financial
 
23 organization that is selected as a program manager or depository
 

 
Page 13                                                    2760
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 and into investment instruments as similar to the original
 
 2 instruments as possible.]
 
 3      (i)  The director of finance may establish a nominal fee for
 
 4 an application for a college account.
 
 5      (j)  The director of finance may enter into contracts for
 
 6 the services of consultants for rendering professional and
 
 7 technical assistance and advice and any other contracts that are
 
 8 necessary and proper for the implementation of the program.
 
 9      (k)  The director of finance may adopt rules to implement
 
10 the program pursuant to chapter 91."
 
11      SECTION 5.  Section 256-4, Hawaii Revised Statutes, is
 
12 amended as follows:
 
13      (1)  By amending subsection (h) to read:
 
14      "(h)  The percentage of the penalty described in subsection
 
15 (f) may be decreased by rule if it is determined that[:
 
16      (1)  The] the penalty is greater than the amount required to
 
17           constitute a greater than de minimis penalty for
 
18           purposes of qualifying the program as a qualified state
 
19           tuition program under section 529 of the Internal
 
20           Revenue Code of 1986, as amended, or successor
 
21           legislation[; and
 
22      (2)  The penalty, when combined with other revenue generated
 
23           under this chapter, is producing more revenue than is
 

 
Page 14                                                    2760
                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1           required to cover the costs of operating the program
 
 2           and recover any prior costs not previously recovered].
 
 3      (2)  By amending subsection (o) to read:
 
 4      "(o)  A local government or organization described in
 
 5 section 501(c)(3) of the Internal Revenue Code of 1986, as
 
 6 amended, or successor legislation, may open and become the
 
 7 account owner of an account to fund scholarships for persons
 
 8 whose [identify] identity shall be determined upon disbursement.
 
 9 Any account opened pursuant to this subsection is not required to
 
10 comply with the condition set forth in subsection (a) that a
 
11 beneficiary be designated when an account is opened, and each
 
12 individual who receives an interest in the account as a
 
13 scholarship shall be treated as a designated beneficiary."
 
14      (3)  By amending subsection (q) to read:
 
15      "(q)  [A qualified withdrawal may be made only after at
 
16 least three calendar years have elapsed from the time an account
 
17 is opened.]  A minimum length of time as determined by the
 
18 director of finance may be required of the account before
 
19 distributions for qualified higher education expenses can be
 
20 made."
 
21      SECTION 6.  Section 256-5, Hawaii Revised Statutes, is
 
22 amended by amending subsection (b) to read as follows:
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      "(b)  Nothing in this chapter shall create or be construed
 
 2 to create any obligation of the director of finance, the State,
 
 3 or any agency or instrumentality of the State to guarantee for
 
 4 the benefit of any account owner or designated beneficiary with
 
 5 respect to:
 
 6      (1)  The rate of interest or other return on any account;
 
 7           [or]
 
 8      (2)  The payment of interest or other return on any
 
 9           account[.]; or
 
10      (3)  The repayment of the principal of any account.
 
11 The director of finance shall provide by rule that every tuition
 
12 savings agreement, contract, application, deposit slip, or other
 
13 similar document that may be used in connection with a
 
14 contribution to an account clearly indicate that the account is
 
15 not insured by the State and neither the principal deposited nor
 
16 the investment return is guaranteed by the State."
 
17      SECTION 7.  Section 256-6, Hawaii Revised Statutes, is
 
18 amended to read as follows:
 
19      "256-6  College savings program trust fund.(a)  There is
 
20 established the college savings program trust fund.  The director
 
21 of finance shall have custody of the fund.  All payments from the
 
22 fund shall be made in accordance with this chapter.
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (b)  The fund shall consist of a trust account and an
 
 2 operating account.  The trust account shall include amounts
 
 3 received by the college savings program pursuant to tuition
 
 4 savings agreements, administrative charges, fees, and all other
 
 5 amounts received by the program from other sources, and interest
 
 6 and investment income earned by the fund.  The director of
 
 7 finance, from time to time, shall make transfers from the trust
 
 8 account to the operating account for the immediate payment of
 
 9 obligations under tuition savings agreements, operating expenses,
 
10 and administrative costs of the college savings program.
 
11 [Administrative costs shall be paid out of the operating
 
12 account.]
 
13      (c)  The director of finance, as trustee, shall invest the
 
14 assets of the fund in securities that constitute legal
 
15 investments under State laws relating to the investment of trust
 
16 fund assets by trust companies, including those authorized by
 
17 article 8 of chapter 412.  Trust fund assets shall be kept
 
18 separate and shall not be commingled with other assets, except as
 
19 provided in this chapter.  The director of finance may enter into
 
20 contracts to provide for investment advice and management,
 
21 custodial services, and other professional services for the
 
22 administration and investment of the program.  [Administrative
 
23 fees, costs, and expenses, including investment fees and
 
24 expenses, shall be paid from the assets of the fund.]
 

 
Page 17                                                    2760
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 1      (d)  The director of finance shall provide for the
 
 2 administration of the fund, including maintaining participant
 
 3 records and accounts, and providing annual audited reports.  The
 
 4 director of finance may enter into contracts for administrative
 
 5 services, including reports.
 
 6      (e)  All administrative fees, costs, and expenses, including
 
 7 investment fees and expenses, shall be paid from the operating
 
 8 account of the fund and, notwithstanding any law to the contrary,
 
 9 may be made without appropriation or allotment."
 
10      SECTION 8.  Statutory material to be repealed is bracketed.
 
11 New statutory material is underscored.
 
12      SECTION 9.  This Act shall take effect upon its approval and
 
13 shall apply to taxable years beginning after December 31, 1999.