REPORT TITLE:
Higher Education


DESCRIPTION:
Creates a college savings program.  (HB307 CD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 1999                                S.D. 1
STATE OF HAWAII                                            C.D. 1
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO HIGHER EDUCATION. 


BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  It is the intent and purpose of the legislature
 
 2 to establish a qualified state tuition program pursuant to
 
 3 section 529 of the Internal Revenue Code of 1986, as amended, or
 
 4 successor legislation, and any regulations promulgated
 
 5 thereunder.
 
 6      SECTION 2.  The Hawaii Revised Statutes is amended by adding
 
 7 a new chapter to be appropriately designated and to read as
 
 8 follows:
 
 9                             "CHAPTER
 
10                      COLLEGE SAVINGS PROGRAM
 
11      §  -1  Definitions.  As used in this chapter, unless the
 
12 context otherwise requires:
 
13      "Account" or "college account" means an individual savings
 
14 account established in accordance with this chapter.
 
15      "Account owner" means the individual who enters into a
 
16 tuition savings agreement pursuant to this chapter and as defined
 
17 under the final regulations adopted by the Internal Revenue
 
18 Service.
 

 
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 1      "Designated beneficiary" means a designated beneficiary as
 
 2 defined in section 529 of the Internal Revenue Code of 1986, as
 
 3 amended, or successor legislation.
 
 4      "Financial organization" means an organization authorized to
 
 5 do business in the State of Hawaii that is:
 
 6      (1)  Certified as an insurer by the insurance commissioner;
 
 7      (2)  Licensed or chartered as a financial institution by the
 
 8           commissioner of financial institutions;
 
 9      (3)  Chartered by an agency of the federal government;
 
10      (4)  Subject to the jurisdiction and regulation of the
 
11           securities and exchange commission of the federal
 
12           government; or
 
13      (5)  Any other entity otherwise authorized to act in this
 
14           state as a trustee pursuant to the provisions of the
 
15           Employee Retirement Income Security Act of 1974, as may
 
16           be amended from time to time.
 
17      "Institution of higher education" means an institution
 
18 defined in section 529 of the Internal Revenue Code of 1986, as
 
19 amended, or successor legislation.
 
20      "Management contract" means the contract executed by the
 
21 director of finance and a financial organization selected to act
 
22 as a depository and manager of the program.
 

 
 
 
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 1      "Member of the family" means a family member as defined in
 
 2 section 529 of the Internal Revenue Code of 1986, as amended, or
 
 3 successor legislation.
 
 4      "Nonqualified withdrawal" means a withdrawal from an account
 
 5 that is not:
 
 6      (1)  A qualified withdrawal;
 
 7      (2)  A withdrawal made as the result of the death or
 
 8           disability of the designated beneficiary of an account;
 
 9           or
 
10      (3)  A withdrawal made on the account of a scholarship.
 
11      "Program" means the college savings program.
 
12      "Program manager" means a financial organization selected by
 
13 the director of finance to act as a depository and manager of the
 
14 program.
 
15      "Qualified higher education expenses" means any qualified
 
16 higher education expense defined in section 529 of the Internal
 
17 Revenue Code of 1986, as amended, or successor legislation.
 
18      "Qualified withdrawal" means withdrawal from an account to
 
19 pay the qualified higher education expenses of the designated
 
20 beneficiary of the account.
 
21      "Tuition savings agreement" means an agreement between the
 
22 director of finance or a financial organization and the account
 
23 owner.
 

 
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 1      §  -2  College savings program established.  There is
 
 2 established the college savings program.  The purpose of this
 
 3 program is to enable families to save for college tuition and
 
 4 other expenses through college accounts.  The program shall
 
 5 provide college accounts to:
 
 6      (1)  Enable residents of this State and other states to
 
 7           benefit from the tax incentive provided for qualified
 
 8           state tuition programs under the Internal Revenue Code
 
 9           of 1986, as amended; and
 
10      (2)  Attract students to public and private colleges and
 
11           universities within the State.
 
12      §  -3  Functions and powers of the director of finance.
 
13 (a)  The director of finance shall implement the program under
 
14 the terms and conditions established by this chapter.  The
 
15 director of finance may make changes to the program as required
 
16 for participants to obtain the federal income tax benefits or
 
17 treatment provided by section 529 of the Internal Revenue Code of
 
18 1986, as amended, or successor legislation.
 
19      (b)  The director of finance may implement the program
 
20 through the use of financial organizations as account
 
21 depositories and managers.  Under the program, individuals may
 
22 establish accounts directly with an account depository.
 

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

 
 
 
 
 
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 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)  The director of finance may enter into a contract of up
 
10 to ten years with a financial organization.  The financial
 
11 organization shall provide only one type of investment
 
12 instrument.  The management contract shall include, at a minimum,
 
13 terms requiring the financial organization to:
 
14      (1)  Take any action required to keep the program in
 
15           compliance with requirements of section   -4 and to
 
16           manage the program to qualify it as a qualified state
 
17           tuition plan under section 529 of the Internal Revenue
 
18           Code of 1986, as amended, or successor legislation;
 
19      (2)  Keep adequate records of each account, keep each
 
20           account segregated from each other account, and provide
 
21           the director of finance with the information necessary
 
22           to prepare the statements required by section   -4;
 

 
 
 
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 1      (3)  Compile information contained in statements required to
 
 2           be prepared under section   -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   -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 certified
 
13           public accountants selected by the program manager, and
 
14           provide the results of the audit to the director of
 
15           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
 

 
 
 
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 1           results of any periodic examination of the manager by
 
 2           any state or federal banking, insurance, or securities
 
 3           commission, except to the extent that the report or
 
 4           reports may not be disclosed under applicable law or
 
 5           the rules of the commission.
 
 6      (e)  The director of finance may select more than one
 
 7 financial organization and investment instrument for the program
 
 8 when the Internal Revenue Service has provided guidance that
 
 9 giving a contributor the choice of two or more investment
 
10 instruments under a state program will not cause the program to
 
11 fail to qualify for favorable tax treatment under section 529 of
 
12 the Internal Revenue Code of 1986, as amended, or successor
 
13 legislation.
 
14      (f)  The director of finance may require an audit to be
 
15 conducted of the operations and financial position of the program
 
16 depository and manager at any time if the director of finance has
 
17 any reason to be concerned about the financial position, the
 
18 recordkeeping practices, or the status of accounts of the program
 
19 depository or manager.
 
20      (g)  During the term of any contract with a program manager,
 
21 the director of finance shall conduct an examination of the
 
22 manager and its handling of accounts.  The examination shall be
 

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

 
 
 
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 1      (i)  The director of finance may establish a nominal fee for
 
 2 an application for a college account.
 
 3      (j)  The director of finance may enter into contracts for
 
 4 the services of consultants for rendering professional and
 
 5 technical assistance and advice and any other contracts that are
 
 6 necessary and proper for the implementation of the program.
 
 7      (k)  The director of finance may adopt rules to implement
 
 8 the program pursuant to chapter 91.
 
 9      §  -4  Program requirements; college account.(a)  A
 
10 college account may be opened by any person who desires to save
 
11 money for the payment of the qualified higher education expenses
 
12 on behalf of a designated beneficiary.  The person shall be
 
13 considered the account owner as defined in section   -1.  An
 
14 application for an account shall be in the form prescribed by the
 
15 program and shall contain the following:
 
16      (1)  The name, address, and social security number or
 
17           employer identification number of the account owner;
 
18      (2)  The designation of a beneficiary;
 
19      (3)  The name, address, and social security number of the
 
20           designated beneficiary;
 
21      (4)  A certification relating to no excess contributions;
 
22           and
 

 
 
 
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 1      (5)  Other information as the program may require.
 
 2      (b)  Only the account owner may make contributions to the
 
 3 account after the account is opened.
 
 4      (c)  Contributions to accounts may be made only in cash.
 
 5      (d)  An account owner may withdraw all or part of the
 
 6 balance from an account on sixty days notice or a shorter period
 
 7 as may be authorized under rules governing the program.  The
 
 8 rules shall include provisions to generally enable the
 
 9 determination of whether a withdrawal is a nonqualified
 
10 withdrawal or a qualified withdrawal.  The rules may require one
 
11 or more of the following:
 
12      (1)  An account owner seeking to make a qualified withdrawal
 
13           shall provide certifications of qualified higher
 
14           education expenses and other information required to
 
15           comply with section 529 of the Internal Revenue Code of
 
16           1986, as amended, or successor legislation;
 
17      (2)  Withdrawals not meeting the requirements of this
 
18           section shall be treated as nonqualified withdrawals by
 
19           the program manager, and if the withdrawals are
 
20           subsequently deemed qualified withdrawals within a
 
21           reasonable time period as specified by the Director of
 
22           Finance, the account owner shall seek any refund of
 
23           penalties directly from the program.
 

 
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 1      (e)  An account owner may change the designated beneficiary
 
 2 of an account to an individual who is a member of the family of
 
 3 the prior designated beneficiary.  An account owner may transfer
 
 4 all or a portion of an account to another college account, the
 
 5 designated beneficiary of which is a member of the same family,
 
 6 as defined in section 529 of the Internal Revenue Code of 1986,
 
 7 as amended, or successor legislation, as the beneficiary of the
 
 8 initial account.  Changes in designated beneficiaries and
 
 9 transfers under this section shall not be permitted if they
 
10 constitute excess contributions.
 
11      (f)  In the case of any nonqualified withdrawal from an
 
12 account, an amount equal to ten per cent (or that rate imposed
 
13 under final regulations adopted by the Internal Revenue Service)
 
14 of the portion of the withdrawal constituting income as
 
15 determined in accordance with the principles of section 529 of
 
16 the Internal Revenue Code of 1986, as amended, or successor
 
17 legislation, shall be withheld as a penalty and paid to the
 
18 college savings program trust fund.
 
19      (g)  The percentage of the penalty described in subsection
 
20 (f) may be increased if the director of finance determines that
 
21 the amount of the penalty must be increased to constitute a
 
22 greater than de minimis penalty for purposes of qualifying the
 

 
 
 
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 1 program as a qualified state tuition program under section 529 of
 
 2 the Internal Revenue Code of 1986, as amended, or successor
 
 3 legislation.
 
 4      (h)  The percentage of the penalty described in subsection
 
 5 (f) may be decreased by rule if it is determined that:
 
 6      (1)  The penalty is greater than the amount required to
 
 7           constitute a greater than de minimis penalty for
 
 8           purposes of qualifying the program as a qualified state
 
 9           tuition program under section 529 of the Internal
 
10           Revenue Code of 1986, as amended, or successor
 
11           legislation; and
 
12      (2)  The penalty, when combined with other revenue generated
 
13           under this chapter, is producing more revenue than is
 
14           required to cover the costs of operating the program
 
15           and recover any prior costs not previously recovered.
 
16      (i)  If an account owner makes a nonqualified withdrawal and
 
17 no penalty amount is withheld pursuant to subsection (f), or the
 
18 amount withheld was less than the amount required to be withheld
 
19 under subsection (f) for nonqualified withdrawals, the account
 
20 owner shall pay the unpaid portion of the penalty to the program.
 
21 The unpaid portion shall be paid on the date that the account
 
22 owner files the account owner's state or federal income tax
 

 
 
 
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 1 return, whichever is filed earlier, for the taxable year of the
 
 2 withdrawal.  If the account owner does not file a return, the
 
 3 unpaid portion shall be paid on the date that the earlier return
 
 4 is due.  Authorized extensions to filing returns may be taken
 
 5 into account in determining the date for paying the unpaid
 
 6 portion.
 
 7      (j)  The program shall provide separate accounting for each
 
 8 designated beneficiary.
 
 9      (k)  No account owner or designated beneficiary of any
 
10 account shall be permitted to direct the investment of any
 
11 contributions to an account or the earnings on it.
 
12      (l)  Neither an account owner nor a designated beneficiary
 
13 shall use an interest in an account as security for a loan.  Any
 
14 pledge of an interest in an account shall be of no force and
 
15 effect.
 
16      (m)  Contributions on behalf of a designated beneficiary in
 
17 excess of those necessary to provide for the qualified higher
 
18 education expenses of the designated beneficiary shall not be
 
19 allowed.  The prohibition on excess contributions shall conform
 
20 to section 529 of the Internal Revenue Code of 1986, as amended,
 
21 or successor legislation.
 

 
 
 
 
 
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 1      (n)  If there is any distribution from an account to any
 
 2 individual or for the benefit of any individual during a calendar
 
 3 year, the distribution shall be reported to the Internal Revenue
 
 4 Service and the account owner, the designated beneficiary, or the
 
 5 distributee, to the extent required by federal law or regulation.  
 
 6      Statements shall be provided to each account owner at least
 
 7 once each year within sixty days after the end of the
 
 8 twelve-month period to which they relate.  The statement shall
 
 9 identify the contributions made during a preceding twelve-month
 
10 period, the total contributions made to the account through the
 
11 end of the period, the value of the account at the end of the
 
12 period, distributions made during the period, and any other
 
13 information that the director of finance requires to be reported
 
14 to the account owner.
 
15      Statements and information relating to accounts shall be
 
16 prepared and filed to the extent required by federal and state
 
17 tax law.
 
18      (o)  A local government or organization described in section
 
19 501(c)(3) of the Internal Revenue Code of 1986, as amended, or
 
20 successor legislation, may open and become the account owner of
 
21 an account to fund scholarships for persons whose identify shall
 
22 be determined upon disbursement.  Any account opened pursuant to
 

 
 
 
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 1 this subsection is not required to comply with the condition set
 
 2 forth in subsection (a) that a beneficiary be designated when an
 
 3 account is opened, and each individual who receives an interest
 
 4 in the account as a scholarship shall be treated as a designated
 
 5 beneficiary.
 
 6      (p)  An annual fee may be imposed upon the account owner for
 
 7 the maintenance of the account.
 
 8      (q)  A qualified withdrawal may be made only after at least
 
 9 three calendar years have elapsed from the time an account is
 
10 opened.
 
11      (r)  The program shall disclose in writing the following
 
12 information to each account owner and prospective account owner
 
13 of a college account:
 
14      (1)  The terms and conditions for purchasing a college
 
15           account;
 
16      (2)  Any restrictions on the substitution of beneficiaries;
 
17      (3)  The person or entity entitled to terminate the tuition
 
18           savings agreement;
 
19      (4)  The period of time during which a beneficiary may
 
20           receive benefits under the tuition savings agreement;
 
21      (5)  The terms and conditions under which money may be
 
22           wholly or partially withdrawn from the program,
 

 
 
 
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 1           including any reasonable charges and fees that may be
 
 2           imposed for withdrawal; and
 
 3      (6)  The probable tax consequences associated with
 
 4           contributions to and distributions from accounts.
 
 5      §  -5  Program limitations; college account.(a) Nothing
 
 6 in this chapter shall be construed to:
 
 7      (1)  Give any designated beneficiary any rights or legal
 
 8           interest with respect to an account;
 
 9      (2)  Guarantee that a designated beneficiary:
 
10           (A)  Will be admitted to an institution of higher
 
11                education; or
 
12           (B)  Upon admission to an institution of higher
 
13                education, will be permitted to continue to attend
 
14                or will receive a degree from the institution;
 
15      (3)  Create state residency for an individual merely because
 
16           the individual is a designated beneficiary; or
 
17      (4)  Guarantee that amounts saved pursuant to the program
 
18           will be sufficient to cover the qualified higher
 
19           education expenses of a designated beneficiary.
 
20      (b)  Nothing in this chapter shall create or be construed to
 
21 create any obligation of the director of finance, the State, or
 
22 any agency or instrumentality of the State to guarantee for the
 

 
 
 
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 1 benefit of any account owner or designated beneficiary with
 
 2 respect to:
 
 3      (1)  The rate of interest or other return on any account; or
 
 4      (2)  The payment of interest or other return on any account.
 
 5 The director of finance shall provide by rule that every
 
 6 contract, application, deposit slip, or other similar document
 
 7 that may be used in connection with a contribution to an account
 
 8 clearly indicate that the account is not insured by the State and
 
 9 neither the principal deposited nor the investment return is
 
10 guaranteed by the State.
 
11      §  -6  College savings program trust fund.(a)  There is
 
12 established the college savings program trust fund.  The director
 
13 of finance shall have custody of the fund.  All payments from the
 
14 fund shall be made in accordance with this chapter.
 
15      (b)  The fund shall consist of a trust account and an
 
16 operating account.  The trust account shall include amounts
 
17 received by the college savings program pursuant to tuition
 
18 savings agreements, administrative charges, fees, and all other
 
19 amounts received by the program from other sources, and interest
 
20 and investment income earned by the fund.  The director of
 
21 finance, from time to time, shall make transfers from the trust
 
22 account to the operating account for the immediate payment of
 

 
 
 
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 1 obligations under tuition savings agreements, operating expenses,
 
 2 and administrative costs of the college savings program.
 
 3 Administrative costs shall be paid out of the operating account.
 
 4      (c)  The director of finance, as trustee, shall invest the
 
 5 assets of the fund in securities that constitute legal
 
 6 investments under State laws relating to the investment of trust
 
 7 fund assets by trust companies, including those authorized by
 
 8 article 8 of chapter 412.  Trust fund assets shall be kept
 
 9 separate and shall not be commingled with other assets, except as
 
10 provided in this chapter.  The director of finance may enter into
 
11 contracts to provide for investment advice and management,
 
12 custodial services, and other professional services for the
 
13 administration and investment of the program.  Administrative
 
14 fees, costs, and expenses, including investment fees and
 
15 expenses, shall be paid from the assets of the fund.
 
16      (d)  The director of finance shall provide for the
 
17 administration of the fund, including maintaining participant
 
18 records and accounts, and providing annual audited reports.  The
 
19 director of finance may enter into contracts for administrative
 
20 services, including reports.
 
21      §  -7  Tax reporting.  The director of finance or the
 
22 program manager of the college savings program, or a designee,
 

 
 
 
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 1 shall file a report annually, with the director of taxation,
 
 2 setting forth the names and identification numbers of account
 
 3 owners, designated beneficiaries, and distributees of college
 
 4 accounts, the amounts contributed to the accounts, the amounts
 
 5 distributed from the accounts, and the nature of the
 
 6 distributions as qualified withdrawals or as withdrawals other
 
 7 than qualified withdrawals, and any other information that the
 
 8 director of taxation may require regarding the taxation under
 
 9 this chapter of amounts contributed to or withdrawn from the
 
10 accounts."
 
11      SECTION 3.  Chapter 654, Hawaii Revised Statutes, is amended
 
12 by adding a new section to be appropriately designated and to
 
13 read as follows:
 
14      "§654-    College savings program.  (a) Moneys in an account
 
15 created pursuant to chapter     are exempt from application to
 
16 the satisfaction of a money judgment as follows:
 
17      (1)  100 per cent of moneys in an account established in
 
18           connection with a scholarship program;
 
19      (2)  100 per cent of moneys in an account where the judgment
 
20           debtor is the account owner and the designated
 
21           beneficiary of the account is a minor; and
 

 
 
 
 
 
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 1      (3)  An amount not exceeding $10,000 in an account, or in
 
 2           the aggregate for more than one account, where the
 
 3           judgment debtor is the account owner of the account or
 
 4           accounts.
 
 5      (b)  For the purposes of this section, the terms "account
 
 6 owner" and "designated beneficiary" shall have the meanings
 
 7 ascribed to them in section   -1."
 
 8      SECTION 4.  Statutory material to be repealed is bracketed.
 
 9 New statutory material is underscored.
 
10      SECTION 5.  This Act, upon its approval, shall apply to
 
11 taxable years beginning after December 31, 1999.