MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

SEC. 402. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS. (a) Eligible Educational Institutions Permitted to Maintain Qualified Tuition Programs.— (1) In general.—Section 529(b)(1) (defining qualified State tuition program) is amended— (A) by inserting “or by 1 or more eligible educational institutions” after “maintained by a State or agency or instrumentality thereof” in the matter preceding subparagraph (A), and (B) by adding at the end the following new flush sentence: “Except to the extent provided in regulations, a program established and maintained by 1 or more eligible educational institutions shall not be treated as a qualified tuition program unless such program provides that amounts are held in a qualified trust and such program has received a ruling or determination that such program meets the applicable requirements for a qualified tuition program. For purposes of the preceding sentence, the term ‘qualified trust’ means a trust which is created or organized in the United States for the exclusive benefit of designated beneficiaries and with respect to which the requirements of paragraphs (2) and (5) of section 408(a) are met.”. (2) Private qualified tuition programs limited to benefit plans.—Clause (ii) of section 529(b)(1)(A) is amended by inserting “in the case of a program established and maintained by a State or agency or instrumentality thereof,” before “may make”. (3) Additional tax on nonqualified withdrawals.—Section 529 is amended— (A) by striking paragraph (3) of subsection (b) and by redesignating paragraphs (4), (5), (6), and (7) of such subsection as paragraphs (3), (4), (5), and (6), respectively, and (B) by adding at the end of subsection (c) the following new paragraph: “(6) Additional tax.—The tax imposed by section 530(d)(4) shall apply to any payment or distribution from a qualified tuition program in the same manner as such tax applies to a payment or distribution from an education individual retirement account. This paragraph shall not apply to any payment or distribution in any taxable year beginning before January 1, 2004, which is includible in gross income but used for qualified higher education expenses of the designated beneficiary.”. (4) Conforming amendments.— (A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 529, 530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are amended by 115 STAT. 61striking “qualified State tuition” each place it appears and inserting “qualified tuition”. (B) The headings for sections 72(e)(9) and 135(c)(2)(C) are amended by striking “qualified state tuition” each place it appears and inserting “qualified tuition”. (C) The headings for sections 529(b) and 530(b)(2)(B) are amended by striking “Qualified state tuition” each place it appears and inserting “Qualified tuition”. (D) The heading for section 529 is amended by striking “state”. (E) The item relating to section 529 in the table of sections for part VIII of subchapter F of chapter 1 is amended by striking “State”. (b) Exclusion From Gross Income of Education Distributions From Qualified Tuition Programs.— (1) In general.—Section 529(c)(3)(B) (relating to distributions) is amended to read as follows: “(B) Distributions for qualified higher education expenses.—For purposes of this paragraph— “(i) In-kind distributions.—No amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense. “(ii) Cash distributions.—In the case of distributions not described in clause (i), if— “(I) such distributions do not exceed the qualified higher education expenses (reduced by expenses described in clause (i)), no amount shall be includible in gross income, and “(II) in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions. “(iii) Exception for institutional programs.—In the case of any taxable year beginning before January 1, 2004, clauses (i) and (ii) shall not apply with respect to any distribution during such taxable year under a qualified tuition program established and maintained by 1 or more eligible educational institutions. “(iv) Treatment as distributions.—Any benefit furnished to a designated beneficiary under a qualified tuition program shall be treated as a distribution to the beneficiary for purposes of this paragraph. “(v) Coordination with hope and lifetime learning credits.—The total amount of qualified higher education expenses with respect to an individual for the taxable year shall be reduced— “(I) as provided in section 25A(g)(2), and “(II) by the amount of such expenses which were taken into account in determining the credit allowed to the taxpayer or any other person under section 25A.115 STAT. 62 “(vi) Coordination with education individual retirement accounts.—If, with respect to an individual for any taxable year— “(I) the aggregate distributions to which clauses (i) and (ii) and section 530(d)(2)(A) apply, exceed “(II) the total amount of qualified higher education expenses otherwise taken into account under clauses (i) and (ii) (after the application of clause (v)) for such year, the taxpayer shall allocate such expenses among such distributions for purposes of determining the amount of the exclusion under clauses (i) and (ii) and section 530(d)(2)(A).”. (2) Conforming amendments.— (A) Section 135(d)(2)(B) is amended by striking “the exclusion under section 530(d)(2)” and inserting “the exclusions under sections 529(c)(3)(B) and 530(d)(2)”. (B) Section 221(e)(2)(A) is amended by inserting “529,” after “135,”. (c) Rollover to Different Program for Benefit of Same Designated Beneficiary.—Section 529(c)(3)(C) (relating to change in beneficiaries) is amended— (1) by striking “transferred to the credit” in clause (i) and inserting “transferred— “(I) to another qualified tuition program for the benefit of the designated beneficiary, or “(II) to the credit”, (2) by adding at the end the following new clause: “(iii) Limitation on certain rollovers.—Clause (i)(I) shall not apply to any transfer if such transfer occurs within 12 months from the date of a previous transfer to any qualified tuition program for the benefit of the designated beneficiary.”, and (3) by inserting “OR PROGRAMS” after “beneficiaries” in the heading. (d) Member of Family Includes First Cousin.—Section 529(e)(2) (defining member of family) is amended by striking “and” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and by inserting and", and by adding at the end the following new subparagraph: “(D) any first cousin of such beneficiary.”. (e) Adjustment of Limitation on Room and Board Distributions.—Section 529(e)(3)(B)(ii) is amended to read as follows: “(ii) Limitation.—The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed— “(I) the allowance (applicable to the student) for room and board included 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 the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or “(II) if greater, the actual invoice amount the student residing in housing owned or operated by 115 STAT. 63the eligible educational institution is charged by such institution for room and board costs for such period.”. (f) Special Needs Services.—Subparagraph (A) of section 529(e)(3) (defining qualified higher education expenses) is amended to read as follows: “(A) In general.—The term ‘qualified higher education expenses’ means— “(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and “(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance.”. (g) Technical Amendments.—Section 529(c)(3)(D) is amended— (1) by inserting “except to the extent provided by the Secretary,” before “all distributions” in clause (ii), and (2) by inserting “except to the extent provided by the Secretary,” before “the value” in clause (iii). (h) Effective Date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2001.