ASSEMBLY, No. 2865

 

STATE OF NEW JERSEY

 

INTRODUCED MAY 1, 1997

 

 

By Assemblyman BAGGER

 

 

An Act establishing a New Jersey family college savings program and providing gross income tax incentives for certain college savings, supplementing Titles 18A and 54A of the New Jersey Statutes.

 

    Be It Enacted by the Senate and General Assembly of the State of New Jersey:

 

    1. Sections 1 through 8 of this act shall be known and may be cited as the "New Jersey College Savings Plan Act."

 

    2. The Legislature hereby finds and declares that promoting the education of the residents of this State and helping students afford the expenses of higher education are in the best interests of the State government; that tuition costs at public and private institutions of higher education are difficult for many to afford: that fostering higher education to provide well-educated citizens is in the best interests of the State; that fostering the ability of students to choose which institution of higher education to attend is in the best interest of the State; that students in the secondary schools tend to achieve a higher standard of performance when the payment of tuition for their higher education is secured; that promoting individual savings for college is in the best interests of the State; and that it is not in the best interest of this State for it to place its funds at risk by providing its full faith and credit to support a college savings program.

    The purposes of this act are to establish a college savings program and provide guidelines for the State in maintaining such program, all with the following goals:

    a. Encouraging individuals to save to help pay the costs of higher education;

    b. Helping make the benefits of higher education available to the people of this State;

    c. Promoting economic development of this State by creating opportunities for a more highly educated workforce;

    d. Enabling residents of the State to benefit from the tax incentives provided for qualified state tuition programs under the federal Internal Revenue Code; and


    e. Attracting students to public and private colleges and universities within the State.

 

    3. As used in this act:

    "Account" means an individual trust account or savings account established in accordance with this act;

    "Account owner" means the person designated at the time an account is opened as having the right to withdraw funds from the account before the account is disbursed to or for the benefit of the designated beneficiary;

    "Authority" means the New Jersey Higher Education Assistance Authority;

    "Designated beneficiary" means, except as provided in subsection j. of section 6 of this act, with respect to an account the individual designated at the time the account is opened as the individual whose higher education expenses are expected to be paid from the account or, if such designated beneficiary is replaced in accordance with subsection c. of section 6 of this act, such replacement;

    "Financial institution" means a bank, a commercial bank, a national bank; a savings bank, a savings and loan, a thrift, a credit union, an insurance company, a trust company, a mutual fund, or other similar entity, and includes a state college savings trust;

    "Higher education institution" means:

    a. an institution described in section 1201 (a) or subparagraph (C) or (D) of section 481 (a) (1) of the federal Higher Education Act of 1965, Pub.L.89-329 (as in effect on October 21, 1988); and

    b. an area vocational education school (as defined in subparagraph (C) or (D) of section 521 (3) of the federal Carl D. Perkins Vocational Education Act, Pub.L.88-210 (20 U.S.C. §2471), as in effect on October 21, 1988) located in the State;

    "Member of family" means with respect to an individual:

    a. an ancestor of the individual,

    b. the spouse of the individual,

    c. a lineal descendent of the individual, of the individual's spouse, or of a parent of such individual,

    d. the spouse of any lineal descendant described in subsection c. of this definition; and

    e. for purposes of this definition, a legally adopted child shall be treated as a child by blood;

    "Office" means the Office of Student Assistance;

    "Nonqualified withdrawal" means a withdrawal from an account other than:

    a. a qualified withdrawal;

    b. a withdrawal made as the result of the death or disability of the designated beneficiary of an account;


    c. a withdrawal made on the account of a scholarship (or allowance or payment described in subparagraphs (B) or (C) of paragraph (1) of subsection (d) of section 135 of the federal Internal Revenue Code of 1986, 26 U.S.C. §135, designated beneficiary, but only to the extent of the amount of that scholarship, allowance, or payment; or

    d. a rollover or change in designated beneficiary described in subsection c. of section 6 of this act;

    "Program" means the "New Jersey Family College Savings Program" established under this act;

    "Qualified higher education expenses" means tuition, fees, books supplies and equipment required for enrollment or attendance of a designated beneficiary at a higher education institution;

    "Qualified withdrawal" means a withdrawal from an account to pay the qualified higher education expenses of the designated beneficiary of the account, but only if made in accordance with rules prescribed under subsection b. of section 6 of this act;

    "State college savings trust" means a trust established by the State or a State agency if:

    a. units in the trust are sold exclusively through the program for college savings; and

    b. The State or State agency manages (with or without the assistance of professional investment advisers) the investments of the trust.

 

    4. a. There is established a "New Jersey Family College Savings Program" in the Office of Student Assistance to be administered by that office in accordance with the provisions of this act. The office shall develop and maintain a program offering college savings instruments to individuals who desire to plan ahead for college or vocational education. The program shall be structured to permit the long-term accumulation of savings that can be used to finance all or a share of the costs of higher education.

    b. In connection with the establishment and maintenance of the program, the office shall have the following powers:

    (1) To develop and implement the program in a manner consistent with the provisions of this act through rules, guidelines, and procedures established in accordance with the "Administrative Procedure Act," P.L.1968, c.410 (C.52:14B-1 et seq.)

    (2) To retain professional services, if necessary, including accountants and auditors; consultants and other experts; and attorneys;

    (3) To employ persons and fix the terms of their employment;

    (4) To seek rulings and other guidance from the United States Department of Treasury and the federal Internal Revenue Service relating to the program;

    (5) To make changes to the program required for the participants in the program to obtain the federal income tax benefits or treatments provided by section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. §529, as amended, or any similar successor legislation;

    (6) To interpret, in rules, policies, guidelines and procedures, the provisions of this act broadly in light of its purposes and objectives;

    (7) To charge, impose, and collect administrative fees and service charges in connection with any agreement contract or transaction relating to the program; and

    (8) To select the financial institution or financial institutions to act as the depository and manger of the program in accordance with section 5 of this act.

    c. The office shall not delegate to any person other than an employee of the office, an employee of the State, or an agency of the State any of its obligations, responsibilities, or powers:

    (1) That are specifically enumerated under subsection b. of this section other than the power to collect administrative fees; or

    (2) To monitor the performance or conduct pursuant to subsection d. of section 5 of this act (except that in the conduct of such activity the office or the authority may seek or rely upon reports from independent accounting or actuarial firms).

 

    5. a. The office shall implement the program through use of a financial institution as an account depository and manger. Under the program, persons may establish accounts through the program at the depository.

    b. (1) The office shall solicit proposals from financial institutions to act as the depository and manager of the program. Financial institutions that submit proposals will be required to describe the financial instrument which will be held in accounts. Proposals may be made by the sponsor or manager of a State college savings trust, a mutual fund, or other entity, rather than the financial institution itself.

         (2) The office shall select as program depository and manger the financial institution or financial institutions from among biding financial institutions that demonstrates the most advantageous combination, both to potential program participants and this State, of the following factors:

    (a) financial stability and integrity of the financial institution;

    (b) the safety of the investment instrument being offered (taking into account any insurance provided with respect to such instrument);

    (c) the ability of the investment instrument to track increasing costs of higher education;

    (d) the ability of the financial institution (directly or through subcontract) to satisfy record keeping and reporting requirements;

    (e) the financial institution's plan for promoting the program and the investment it is willing to make to promote the program;

    (f) the fees, it any, proposed to be charged to persons for opening accounts;

    (g) minimum initial deposit and minimum contributions that the financial institution will require and the willingness of financial institution to accept contributions through payroll deduction plans; and

    (h) other benefits to the State or its residents in the proposal, including fees payable to the State to cover expenses of operation of the program.

    (3) The office shall enter into a contract with a financial institution or with financial institutions, to serve as program manager and depository. Each financial institution participating in the program shall provide only one type of investment instrument.

    (4) The office may select more than one financial institution and investment instrument for the program if:

    (a) the federal Internal Revenue Service has provided guidance that giving a contributor choice of more than one investment instrument under a State tuition program will not cause the plan to fail to qualify for favorable tax treatment under section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. §529; and

    (b) the office concludes that the choice of investment vehicles is in the best interest of college savers and will not interfere with the promotion of the program.

    c. A program manager shall:

    (1) Take all action required to keep the program in compliance with requirements of section 6 of this act and all action not contrary to this act or its contract to manage the program so that it is treated as a "qualified State tuition program" under section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. §529;

    (2) Keep adequate records of each account, keep each account segregated from each other account, and provide the office with the information necessary to prepare statements required by subsection j. of section 6 of this act or file such statements on behalf of the office;.

    (3) Compile and total information contained in statements required to be prepared under subsection i.of section 6 of this act and provide such compilations to the office;

    (4) If there is more than one program manager, provide the office with such information to assist the authority to determine compliance with subsection h. of section 6 of this act,

    (5) Provide representatives of the office, including other contractors or other State agencies, access to the books and records of the program manager to the extent needed to determine compliance with the contract; and

    (6) To hold all accounts in trust for the benefit of the State and the account owners.

    d. (1) (a) The office may conduct an audit of the operations and financial position of the program manager and depository at any time if the office has any reason to be concerned about the financial position of the program manger and depository, the record keeping practices of the program manager and depository, or the status of accounts.

    (b) (i.) The office shall require that the program manager and depository be audited at least annually by a firm of certified public accountants selected by the program manager and that the results of such audit be provided to the office.

    (ii) The program manager shall be required to provide the office with copies of all regulatory filings and reports made by it during the term of the contract or while it is holding any accounts, other than confidential filings or reports that will not become part of the public record. The program manager shall make available for review by the office the results of any periodic examination of the manager by any state or federal banking, insurance, or securities commission, except to the extent that such reports may not be disclosed under applicable law or the rules of such commission.

    (iii) At least once during the term of any contract with a program manger, the office or an appropriate State agency in consultation with the office shall conduct an examination of the manager and its handling of accounts. Such examination shall be conducted at least biannually if the manager is not subject to periodic examination by a State agency, the Federal Deposit Insurance Corporation or other similar entity.

    (2) No person shall circulate any description of the Program, whether in writing or through the use of any media, unless such description is first approved by the authority or its designee.

    e. (1) Any contract described in subsection b. of this section shall be for a term of at least three years and not more than seven years.

    (2) If a contract described in subsection b. of this section is not renewed, after the end of its term:

    (a) Accounts previously established and held in investment instruments at such financial institution shall not be terminated;

    (b) Additional contributions may be made to such accounts; and

    (c) No new accounts may be placed with such financial institution.

    (3) The office may terminate a contract with a financial institution at any time for good cause. In such case, the office shall take custody of accounts held at such financial institution and shall seek to promptly transfer the accounts to another financial institution that is selected as a program manager and into investment instruments as similar to the original instruments as possible.

    f. The office may enter into such other contracts as it deems necessary and proper for the implementation of the program.

 

    6. a. (1) The program shall be operated through use of accounts.

    (2) An account may be opened by any person who desires to save to pay the qualified higher education expenses of an individual by:


    (a) completing an application in the form prescribed by the office, which application shall require:

    (i.) the name, address and social security number or employer identification number of the contributor;

    (ii) the name, address and social security number of the account owner if different from the contributor;

    (iii) the designation of a designated beneficiary;

    (iv) the name, address, and social security number of the designated beneficiary;

    (v) the certification relating to no excess contributions required by subsection h. of this section; and

    (vi) such other information as the authority may require;

    (b) paying the application fee, if any, established by the authority;

    (c) making the minimum contribution required by the authority or opening an account; and

    (d) designating the type of account to be opened if more than one type of account is offered.

    (3) Any person may make contributions to an account once the account is opened.

    (4) Contributions to an account may be made only in cash.

    b. Account owners may withdraw all or part of the balance from an account on 60 days notice, or such shorter period as the office may prescribe, under rules prescribed by the office. Such rules shall include provisions that will generally enable the office or program manager to determine if a withdrawal is a nonqualified withdrawal or a qualified withdrawal. The rules may, but need not, require one or more of the following:

    (1) account owners seeking to make a qualified withdrawal or other withdrawal that is not a nonqualified withdrawal provide certifications, copies of bills for qualified higher education expenses or other supporting material;

    (2) qualified withdrawals from an account be made only by check payable jointly to the designated beneficiary and a higher education institution; and

    (3) withdrawals not meeting certain requirements be treated as nonqualified withdrawals by the program manager and that if such withdrawals are not nonqualified withdrawals, the account owner must seek refunds of penalties directly from the office.

    c. (1) An account owner may change the designated beneficiary of an account to an individual who is a member of the family of the old designated beneficiary in accordance with procedures established by the authority.

    (2) Upon the direction of an account owner, all or a portion of an account may be transferred to another account of which the designated beneficiary is a member of the family of the designated beneficiary of the transferee account.

    (3) Changes in designated beneficiaries and rollovers under this subsection shall not be permitted to extent that they would violate:

    (a) subsection h. of this section, relating to excess contributions, or

    (b) subsection f. of this section, relating to investment direction.

    d. (1) In the case of any nonqualified withdrawal from an account, an amount equal to 5 percent of the portion of the proposed withdrawal that would constitute income as determined in accordance with the principles of section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. §529, shall be withheld as a penalty and paid to the office.

    (2) (a) The office shall prescribe an increase in the percentage of the penalty described in paragraph (1) of this subsection or change the base on which such penalty is based if the office determines that the amount of the penalty must be increased to constitute a more than "de minimis" penalty for purposes of qualifying the program as a "qualified State tuition program" under section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. §529.

    (b) The office may in its sole discretion decrease the percentage of the penalty described in paragraph (1) of this subsection if it determines that the penalty is greater than is required to constitute a more than "de minimis" penalty for purposes of qualifying the program as a "qualified State tuition program" under section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. §529.

    (3) If an account owner makes a nonqualified withdrawal and no penalty amount is withheld pursuant to paragraph (1) of this subsection or the amount withheld was less than the amount required to be withheld under that paragraph for nonqualified withdrawals, the account owner shall pay the unpaid portion of the penalty to the State Treasurer at the same time that the account owner files a gross income tax return for the taxable year of the withdrawal (or if the account owner does not file a return, the due date for a gross income tax return) but in any event on or before the due date for that return (taking into account authorized extensions).

    e. (1) Each account shall be maintained separately from each other account under the program.

    (2) Separate records and accounting shall be maintained for each account for each designated beneficiary.

    f. (1) No contributor to, account owner, or designated beneficiary of any account shall be permitted to direct the investment of any contributions to an account or the earnings thereon.

    (2) If the office terminates the authority of a financial institution to hold accounts and accounts must be moved from that financial institution to another financial institution, the office shall select the financial institution and type of investment to which the balance of the account is moved unless the federal Internal Revenue Service provides guidance stating that in such conditions allowing the account owner to select among several financial institutions that are then contractors would not cause a plan to cease to be a "qualified State tuition program" for the purposes of section 529 of the federal Internal Revenue Code, 26 U.S.C. § 529.

    g. An account owner or a designated beneficiary shall not use an interest in an account as security for a loan. Any pledge of an interest in an account shall be of no force and effect.

    h. (1) The office shall adopt regulations to prevent contributions on behalf of a designated beneficiary in excess of those necessary to pay the qualified higher education expenses of the designated beneficiaries.

    (2) The rules or regulations adopted under paragraph (1) shall include:

    (a) procedures for aggregating the total balances of multiple accounts established for a designated beneficiary;

    (b) establishment of a maximum total balance that may be held in accounts for a designated beneficiary;

    (c) requirements that persons who contribute to an account certify that to the best of their knowledge that the balance in all "qualified State tuition programs" as defined in section 529 of the Internal Revenue Code of 1986, 26 U.S.C. §529, of which the designated beneficiary is the designated beneficiary does not exceed the lesser of:

    (i.) a maximum college savings amount established by the authority from time to time, or

    (ii) the cost in current dollars of qualified higher education expenses that the contributor reasonably anticipates the designated beneficiary will incur; and

    (d) requirements that any excess balances with respect to a designated beneficiary be promptly withdrawn in a nonqualified withdrawal or rolled over to another account in accordance with subsection c. of this section.

    i.. (1) If there is any distribution from an account to any individual or for the benefit of any individual during a calendar year, such distribution shall be reported to the federal Internal Revenue Service and to the account owner or designated beneficiary to the extent required by federal law or regulation.

    (2) Statements shall be provided to each account owner at least once each year within 31 days of the 12-month period to which they relate. The statement shall identify the contributions made during a preceding 12-month period, the total contributions made through the end of the period, the value of the account as of the end of the period, distributions made during the period and any other matters that the office shall prescribe be reported to the account owner.

    (3) Statements and information returns relating to accounts shall be prepared and filed to the extent required by federal or State law.

    j. (1) A State or local government or an organization described in paragraph (3) of subsection (c) of section 501 of the federal Internal Revenue Code of 1986, 26 U.S.C. §501, may open and become the account owner of an account to fund scholarships for persons whose identity will be determined after an account is opened.

    (2) In the case of any account described in paragraph (1) of this subsection:

    (a) the requirement that a designated beneficiary be designated when an account is opened shall not apply; and

    (b) each individual who receives an interest in such account as a scholarship shall be treated as a designated beneficiary with respect to such interest.

 

    7. a. Any student loan program, student grant program, or other financial assistance program established or administered by the State shall treat the balance in an account of which the student is a designated beneficiary as if it were an asset of the parent of the designated beneficiary and not as a scholarship or grant or as an asset of the student for purposes of determining a student or parent's income, assets or financial need.

    b. Subsection a. of this section shall apply to any financial assistance program administered by a State supported college or university.

    c. Subsections a. and b. of this section shall not apply to the extent that:

    (1) federal law requires all or a portion of the amount in an account to be taken into account in a different manner,

    (2) federal benefits could be lost if all or a portion of the amount in an account is not taken into account in a different manner, or

    (3) a specific grant establishing a financial assistance program requires that all or a portion of the amount in an account be taken into account.

 

    8. a. Nothing in this act shall:

    (1) give any designated beneficiary any rights or legal interest with respect to account unless the designated beneficiary is the account owner;

    (2) guarantee that a designated beneficiary will be admitted to a higher education institution;

    (3) create State residency for an individual merely because the individual is a designated beneficiary; or

    (4) guarantee that amounts saved pursuant to the program will be sufficient to cover the qualified higher education expenses of a designated beneficiary.

    b. (1) Nothing in this act shall create or be construed to create any obligation of the office, the authority, the State, or any agency or instrumentality of the State to guarantee for the benefit of any account owner, contributor to an account, or designated beneficiary:

    (a) the return of any amounts contributed to an account;

    (b) the rate of interest or other return on any account; or

    (c) the payment of interest or other return on any account.

    (2) Under regulations to be adopted by the office, every contract, application, deposit slip, or other similar document that may be used in connection with a contribution to an account shall clearly indicate that the account is not insured by the State and neither the principal deposited nor the investment return is guaranteed by the State. 

    9. a. Gross income of a designated beneficiary of the "New Jersey Family College Savings Program" established pursuant to P.L. , c. (C. )(now pending before the Legislature as this bill), or a contributor to that program, shall not include the earnings of amounts invested in that program, except as provided by subsection b. of this section.

    b. Gross income of a designated beneficiary of the "New Jersey Family College Savings Program," or a contributor to that program, shall include distributions or deemed distributions from that program to the extent that amounts are included in their federal gross income pursuant to section 529 of the federal Internal Revenue Code of 1986, 26 U.S.C. §529.

    

    10. This act shall take effect immediately.

 

 

STATEMENT

 

    This bill establishes the "New Jersey Family College Savings Program" in the New Jersey Office of Student Assistance. The program will provide a vehicle for savings for future payment of higher education costs.

    The bill authorizes a program in the Office of Student Assistance that allows people to make contributions to an account that is established for the purpose of meeting the qualified higher education expenses of a designated person. The office is responsible for selecting financial institutions that will provide investiments and market the program to New Jersey families.

    The program is designed so that it will qualify as a "qualified State tuition program" under the federal Internal Revenue Code. No amount of investment earnings will be included in the federal taxable income of a contributor to, or beneficiary of, the program with respect to any contribution to, or earnings under, the program. When amounts are distributed from the program for qualified educational expenses, the amount of earnings will be included in the beneficiary's taxable income. The beneficiary (a college student) will probably be taxed at a lower rate than the contributor (in many cases, the student's parents) so less total taxes will be due.

    The bill also provides a treatment equivalent to the federal treatment under the New Jersey gross income tax, to provide a further incentive for college savings. The administrative costs incurred by the Office of Student Assistance are paid in part by small application fees and fees on non-qualified withdrawals.

 

 

                             

 

"New Jersey College Savings Plan Act;" provides gross income tax incentives for certain college savings.