MODIFICATIONS OF QUALIFIED STATE TUITION PROGRAMS.

SEC. 211. MODIFICATIONS OF QUALIFIED STATE TUITION PROGRAMS. (a) Qualified Higher Education Expenses To Include Room and Board.—Paragraph (3) of section 529(e) (defining qualified higher education expenses) is amended to read as follows: “(3) Qualified higher education expenses.— “(A) In general.—The term ‘qualified higher education expenses’ means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution. “(B) Room and board included for students under guaranteed plans who are at least half-time.— “(i) In general.—In the case of an individual who is an eligible student (as defined in section 25A(b)(3)) for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified State tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(7), a designated beneficiary shall be treated as meeting the requirements of this clause. “(ii) Limitation.—The amount treated as qualified higher education expenses by reason of the preceding sentence shall not exceed the minimum amount (applicable to the student) included for room and board for such period in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 108711, as in effect on the date of the enactment of this paragraph) for the eligible educational institution for such period.”. (b) Additional Modifications.— (1) Member of family.—Paragraph (2) of section 529(e) (relating to other definitions and special rules) is amended to read as follows: “(2) Member of family.—The term ‘member of the family’ means— “(A) an individual who bears a relationship to another individual which is a relationship described in paragraphs (1) through (8) of section 152(a), and “(B) the spouse of any individual described in subparagraph (A).”. (2) Eligible educational institution.—Section 529(e) is amended by adding at the end the following: “(5) Eligible educational institution.—The term ‘eligible educational institution’ means an institution— “(A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this paragraph, and “(B) which is eligible to participate in a program under title IV of such Act.”. (3) Estate and gift tax treatment.— (A) Gift tax treatment.—111 STAT. 811 (i) Paragraph (2) of section 529(c) is amended to read as follows: “(2) Gift tax treatment of contributions.—For purposes of chapters 12 and 13— “(A) In general.—Any contribution to a qualified tuition program on behalf of any designated beneficiary— “(i) shall be treated as a completed gift to such beneficiary which is not a future interest in property, and “(ii) shall not be treated as a qualified transfer under section 2503(e). “(B) Treatment of excess contributions.—If the aggregate amount of contributions described in subparagraph (A) during the calendar year by a donor exceeds the limitation for such year under section 2503(b), such aggregate amount shall, at the election of the donor, be taken into account for purposes of such section ratably over the 5-year period beginning with such calendar year.”. (ii) Paragraph (5) of section 529(c) is amended to read as follows: “(5) Other gift tax rules.—For purposes of chapters 12 and 13— “(A) Treatment of distributions—Except as provided in subparagraph (B), in no event shall a distribution from a qualified tuition program be treated as a taxable gift. “(B) Treatment of designation of new beneficiary.—The taxes imposed by chapters 12 and 13 shall apply to a transfer by reason of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) only if the new beneficiary is a generation below the generation of the old beneficiary (determined in accordance with section 2651).”. (B) Estate tax treatment.—Paragraph (4) of section 529(c) is amended to read as follows: “(4) Estate tax treatment.— “(A) In general.—No amount shall be includible in the gross estate of any individual for purposes of chapter 11 by reason of an interest in a qualified tuition program. “(B) Amounts includible in estate of designated beneficiary in certain cases.—Subparagraph (A) shall not apply to amounts distributed on account of the death of a beneficiary. “(C) Amounts includible in estate of donor making excess contributions.—In the case of a donor who makes the election described in paragraph (2)(B) and who dies before the close of the 5-year period referred to in such paragraph, notwithstanding subparagraph (A), the gross estate of the donor shall include the portion of such contributions properly allocable to periods after the date of death of the donor.”. (4) Prohibition against investment direction.—Section 529(b)(5) is amended by inserting “directly or indirectly” after “may not”. (c) Coordination With Education Savings Bond.—Section 135(c)(2) (defining Qualified higher education expenses) is amended by adding at the end the following:111 STAT. 812 “(C) Contributions to qualified state tuition program.—Such term shall include any contribution to a qualified State tuition program (as defined in section 529) on behalf of a designated beneficiary (as defined in such section) who is an individual described in subparagraph (A); but there shall be no increase in the investment in the contract for purposes of applying section 529(c)(3)(A) by reason of any portion of such contribution which is not includible in gross income by reason of this subparagraph.”, (d) Clarification of Taxation of Distributions—Subparagraph (A) of section 529(c)(3) is amended by striking “section 72” and inserting “section 72(b)”. (e) Technical Amendments.— (1)(A) The heading for part VIII of subchapter F of chapter 1 is amended to read as follows: “PART VIII—HIGHER EDUCATION SAVINGS ENTITIES”. (B) The table of parts for subchapter F of chapter 1 is amended by striking the item relating to part VIII and inserting: “Part VIII. Higher education savings entities.”. (2)(A) Section 529(d) is amended to read as follows: “(d) Reports.—Each officer or employee having control of the qualified State tuition program or their designee shall make such reports regarding such program to the Secretary and to designated beneficiaries with respect to contributions, distributions, and such other matters as the Secretary may require. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.”. (B) Paragraph (2) of section 6693(a) (relating to failure to provide reports on individual retirement accounts or annuities) is amended by striking “and” at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting “, and”, and by adding at the end the following new subparagraph: “(C) Section 529(d) (relating to qualified State tuition programs).”. (C) The section heading for section 6693 is amended by Striking “individual retirement” and inserting “certain tax-favored”. (D) The item relating to section 6693 in the table of sections for part I of subchapter B of chapter 68 is amended by striking “individual retirement” and inserting “certain tax-favored”. (f) Effective Dates.— (1) In general.—Except as otherwise provided in this subsection, the amendments made by this section shall take effect on January 1, 1998. (2) Expenses to include room and board.—The amendment made by subsection (a) shall take effect as if included in the amendments made by section 1806 of the Small Business Job Protection Act of 1996. (3) Eligible educational institution.—The amendment made by subsection (b)(2) shall apply to distributions after 111 STAT. 813December 31, 1997, with respect to expenses paid after such date (in taxable years ending after such date), for education furnished in academic periods beginning after such date. (4) Coordination with education savings bonds.—The amendment made by subsection (c) shall apply to taxable years beginning after December 31, 1997. (5) Estate and gift tax changes.— (A) Gift tax changes.—Paragraphs (2) and (5) of section 529(c) of the Internal Revenue Code of 1986, as amended by this section, shall apply to transfers (including designations of new beneficiaries) made after the date of the enactment of this Act. (B) Estate tax changes.—Paragraph (4) of such section 529(c) shall apply to estates of decedents dying after June 8, 1997. (6) Transition rule for pre-august 20,1996 contracts.— In the case of any contract issued prior to August 20, 1996, section 529(c)(3)(C) of the Internal Revenue Code of 1986 shall be applied for taxable years ending after August 20, 1996, without regard to the requirement that a distribution be transferred to a member of the family or the requirement that a change in beneficiaries may be made only to a member of the family.