S. 1133 Parent and Student Savings
Account PLUS Act
Reported from the Committee on Finance in the nature of a substitute, and with an
amendment to the title, February 19, 1998, by a vote of 11 to 8; Minority Views filed. S. Rept.
105-164.
NOTEWORTHY
- At press time, it was expected that the Majority Leader would attempt to turn to the
consideration of the education savings bill on Friday, with the possible filing of a cloture petition
on the motion to proceed to the House-passed bill, H.R. 2646 (Senate Calendar item No. 227).
- S. 1133 provides some $6 billion (over 10 years) in tax relief for education.
- S. 1133 expands the recent education savings account changes included in the Taxpayer
Relief Act of 1997 [P.L. 105-34] by increasing the annual contribution limit for education IRAs
from $500 to $2,000 for taxable years 1999 through 2002. The bill also expands the definition of
qualified education expenses (currently limited to higher education) to include K through 12
expenses.
- The bill provides an exclusion from gross income for distributions made from a qualified
state tuition program. Distributions must be made for qualified education expenses related to
attending college (including graduate school) or vocational school.
- S. 1133 extends the current-law section 127 tax exclusion from May 31, 2000, to
December 31, 2002, and permits graduate-level courses to be included in the section 127 tax
exclusion from an employee's gross income for employer-provided (up to $5,250 a year)
education assistance.
- The bill assists local governments in issuing bonds for school construction by increasing
the small-issuer exception from $10 million to $15 million, provided that at least $10 million of
the bonds are issued to finance public schools.
- The bill contains nearly $6.9 billion in offsets (revenue raisers) over 10 years to come
from modifications to the employer deduction for vacation pay ($3.6 billion), and treatment of
the foreign tax credit carrryback and carryforward periods ($3.3 billion).
BACKGROUND
Current Procedural Situation
Because S. 1133 includes a revenue provision, the House exercised its "blue slip"
prerogative based on the constitutional requirement that revenue bills originate in the House.
Therefore, the Senate likely will be voting on the motion to proceed to the House bill which, if
successful, would allow the Senate to move to substitute the Senate language in S. 1133 for the
House language. H.R. 2646 passed the House on October 23 by a vote of 230-198.
Legislative History
By a vote of 59 to 41, the Senate adopted Senator Coverdell's K-through-12 Education
Savings No. 150). The provision was included in the final budget agreement reached with the
White House, but due to a last-minute veto threat from President Clinton, the language was
dropped from the conference report (H.R. 2014) prior to its consideration in the House and
Senate. The TRA became law with education IRAs limited to $500 per student annually, and
limited to higher education expenses (see below).
The Coverdell proposal was again considered in the Senate as a freestanding bill (H.R. 2646,
"Gingrich-Archer") just prior to sine die adjournment. Two attempts were made to
invoke cloture on the bill. On October 31, the Senate failed to invoke cloture by a vote of 56 to
41 (vote No. 288) and again failed to cut off debate on the measure on November 4, by a vote of
56 to 44 (vote No. 291). [For further details on H.R. 2646, refer to RPC Legislative Notice No.
44, issued October 29, 1997.]
Current Law
The Taxpayer Relief Act of 1997 provides tax exempt status to education IRAs that are
established to pay for the expenses of higher education only. Contributions to an education IRA
may not exceed $500 per-beneficiary annually and may not be made once the beneficiary reaches
age 18. The annual $500 contribution limit is phased out ratably for contributors with modified
adjusted gross income (AGI) between $95,000 and $110,000 for individuals and between
$150,000 and $160,000 for joint filers.
BILL
PROVISIONS
Title I
A-PLUS Education Savings Accounts
- S. 1133 increases the annual contribution limit from $500 to $2,000 for education
IRAs and expands the definition of "qualified education expenses" to include the costs of
elementary and secondary education (including home schooling expenses).
- The new $2,000 limit will be in effect from January 1, 1999, through December 31,
2002. For 2003 and future years, annual contributions will revert to the $500 limit and will be
limited to post-secondary education expenses.
- Qualified elementary and secondary expenses include (1) tuition, fees, academic
tutoring, special needs services, books, supplies, as well as the cost of computers and other
equipment incurred "in connection with the enrollment or attendance" of a student in a private or
public school; and (2) room and board, uniforms, transportation and supplementary items
(including after-school care), "required or provided by a school for enrollment or
attendance."
- The bill removes the current age limit (i.e., age 18) for contributions made on behalf of
a special needs individual. For special needs individuals, the bill also removes the current age
limit (i.e., age 30) by which any remaining balance in an education IRA must be
distributed.
- The bill clarifies that corporations and other entities (e.g., charitable organizations,
foundations, etc.) are permitted to make contributions to an education IRA, regardless of the
corporation's income for that year.
- The bill retains the current-law eligibility requirements for high-income individuals.
Contributions are phased out ratably at incomes between $95,000 and $110,000 (for individuals)
and $150,000 and $160,000 (for joint returns).
- These provisions provide $1.64 billion in tax relief over 10 years.
Qualified State Tuition Programs
- The bill provides for the tax-exempt treatment of funds distributed from a qualified
state tuition program. Amounts distributed for the qualified education expenses of attending a
college, university (including graduate school), or vocational school are not included in the gross
income of the contributor (or the beneficiary) for tax purposes.
- The exclusion from gross income is not permitted in cases where a HOPE or Lifetime
Learning credit is claimed on behalf of a student.
- If a parent chooses to claim a HOPE or a Lifetime Learning credit for a dependent, then
the earnings portion of a distribution made to a student from a qualified state tuition program will
be included in the gross income of the student.
- These provisions provide $1.57 billion in tax relief over 10 years.
Extension of Employer-Provided Education Assistance
- The bill extends to December 31, 2002, the current-law exclusion from an employee's
gross income amounts paid or incurred by an employer for education assistance provided to the
employee. The provision is scheduled to expire with respect to courses beginning after May 31,
2000.
- The bill also reinstates the tax exclusion for graduate level courses.
- The exclusion is limited to $5,250 of education assistance per employee in any calendar
year.
- These provisions provide $2.63 billion in tax relief over 10 years.
Small Issuer Exception for Government Bonds
- The bill increases local governments' small issuer exception to $15 million, provided
that at least $10 million of the bonds are issued to finance public schools.
- Under current law, arbitrage profits earned on tax-exempt bonds must be rebated to the
federal government. However, an exception (the "small issuer exception") allows local
government units to issue government bonds without the arbitrage rebate requirement in order to
encourage public school construction. The current limit on the small issuer exception is $10
million for government units that issue at least $5 million in bonds for public schools during the
calendar year.
- These provisions cost $194 million over 10 years.
Tax-Free Treatment of National Health Corps Scholarships
- The bill would allow students who receive a National Health Corps scholarship to
exclude the dollar value of the scholarship from their gross income for tax purposes. The tax-
free treatment will be extended to scholarships received by medical, dental, nursing, and
physician assistant students under the National Health Corps Scholarship Program.
- Consistent with current law, the tax-free treatment does not apply to amounts received
by students to cover regular living expenses, such as room and board.
- These provisions have a negligible cost (according to the Joint Tax
Committee).
Title II
Revenue Offsets
Pay-as-you-go procedures under the Budget Act require offsets in mandatory spending for
any legislation that decreases revenues. As reported from the Finance Committee, the bill
contains two offsets totaling $6.88 billion over fiscal years 1998-2008.
Employer Deduction for Vacation Pay
The bill provides that, for purposes of determining whether an item of compensation (other
than severance pay), is deferred compensation, the compensation is not considered to be paid or
received until it is actually received by the employee.
In addition, an item of deferred compensation is not considered paid to an employee until it
is actually received by an employee.
The bill overrules the Schmidt Baking decision which held that letters of credit
may constitute actual receipt by the employee of an item of deferred compensation.
The Joint Committee on Taxation (JCT) estimates that this provision will increase tax
revenue by $3.6 billion over 10 years.
Modification to Foreign Tax Credit Carryover Period
The bill reduces from two years to one year the carryback period for excess foreign tax
credits. The bill also extends the excess foreign tax credit carryforward period from five years to
seven years.
JCT estimates that these modifications will increase tax revenue by $3.26 billion over 10
years.
ADMINISTRATION
POSITION
The President and his advisers have issued numerous veto threats against legislation
extending the use of education IRAs to elementary and secondary education. In a March 12,
1998 Statement of Administration Policy, the White House reiterated its strong opposition to
expanding education savings accounts. According to the statement:
If S. 1133, or its House companion measure H.R. 2646, were presented to the
President, the Secretaries of Education and the Treasury would recommend that he veto the bill
because it is bad education policy and bad tax policy.
COSTS
The Joint Committee on Taxation projects 10-year costs for the Education IRAs to be $1.644
billion; the qualified state tuition programs provision to be $1.568 billion; the employer-provided
education assistance expansion to be $2.627 billion; and the small-issuer arbitrage rebate
exception to be $194 million. Total 10-year cost is $6.033 billion, with revenue offsets
(described above) of $6.877 billion.
OTHER VIEWS
Senators Moynihan, Baucus, Rockefeller, Conrad, Moseley-Braun, Bryan, and Kerrey jointly
filed Minority Views in the committee report, beginning on p. 29.
POSSIBLE AMENDMENTS
Daschle. Substitute that would delete K-12 provisions, and add school construction.
Unknown. To reduce income phaseouts (Sen. Rockefeller offered such an amendment in
committee, which was defeated).
Unknown. To strike private school tuition.