HB-5138, As Passed House, October 9, 2007

HOUSE BILL No. 5138

August 23, 2007, Introduced by Reps. Melton, Clack, Johnson, Clemente, Constan, Bieda, Hopgood, Sak, Kathleen Law, Accavitti, Polidori, Brown, Corriveau, Coulouris, Byrum, Angerer and Dean and referred to the Committee on Education.

A bill to amend 2000 PA 161, entitled

"Michigan education savings program act,"

by amending sections 2, 3, 4, 5, 7, 9, 11, 12, and 15 (MCL

390.1472, 390.1473, 390.1474, 390.1475, 390.1477, 390.1479,

390.1481, 390.1482, and 390.1485), sections 2, 7, and 9 as amended

by 2004 PA 387 and section 3 as amended by 2001 PA 215.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 2. As used in this act:

(a) "Account" or "education savings account" means an account

established under this act.

(b) "Account owner" means any of the following:

(i) The individual who enters into a Michigan education savings

program agreement and establishes an education savings account. The

account owner may also be the designated beneficiary of the

account.

(ii) An entity exempt from taxation under section 501(c)(3) of

the internal revenue code or an estate or trust that enters into a

Michigan education savings program agreement and establishes an

education savings account.

education trust described in section 10 of the Michigan education

trust act, 1986 PA 316, MCL 390.1430.

(d) "Department" means the department of treasury.

(e) "Designated beneficiary" means the individual designated

as the individual whose higher education expenses are expected to

be paid from the account.

(f) "Eligible educational institution" means that term as

defined in section 529 of the internal revenue code or a college,

university, community college, or junior college described in

section 4, 5, or 6 of article VIII of the state constitution of

1963 or established under section 7 of article VIII of the state

constitution of 1963.

(g) "Internal revenue code" means the United States internal

revenue code of 1986 in effect on January 1, 2002 or at the option

of the taxpayer, in effect for the current year.

(h) "Management contract" means the contract executed between

the treasurer and ~~the~~ a program manager.

(i) "Member of the family" means a family member as defined in

section 529 of the internal revenue code.

(j) "Michigan education savings program agreement" means the

agreement between the program and an account owner that establishes

an education savings account.

(k) "Program" means the Michigan education savings program

established pursuant to this act.

(l) "Program manager" means ~~the~~ an entity selected by the

treasurer to act as ~~the~~ a manager of 1 or more of the savings plans

offered under the program.

(m) "Qualified higher education expenses" means qualified

higher education expenses as defined in section 529 of the internal

revenue code.

(n) "Qualified withdrawal" means a distribution that is not

subject to a penalty or an excise tax under section 529 of the

internal revenue code, a penalty under this act, or taxation under

the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.532, and

that meets any of the following:

(i) A withdrawal from an account to pay the qualified higher

education expenses of the designated beneficiary incurred after the

account is established.

(ii) A withdrawal made as the result of the death or disability

of the designated beneficiary of an account.

(iii) A withdrawal made because a beneficiary received a

scholarship that paid for all or part of the qualified higher

education expenses of the beneficiary to the extent the amount of

the withdrawal does not exceed the amount of the scholarship.

(iv) A withdrawal made because a beneficiary attended a service

academy to the extent that the amount of the withdrawal does not

exceed the costs of the advanced education attributable to the

beneficiary's attendance in the service academy.

(v) (iv) A transfer of funds due to the termination of the

management contract as provided in section 5.

(vi) (v) A transfer of funds as provided in section 8.

(o) "Savings plan" or "plans" means a plan that provides

different investment strategies and allows account distributions

for qualified higher education expenses.

(p) "Service academy" means the United States military

academy, United States naval academy, United States air force

academy, United States coast guard academy, or United States

merchant marine academy.

(q) ~~(o)~~ "Treasurer" means the state treasurer.

Sec. 3. (1) The Michigan education savings program is

established in the department of treasury. The program may consist

of 1 or more savings plans.

(2) The treasurer shall solicit proposals from entities to be

~~the~~ a program manager to provide the services described in

subsection (5).

(3) The purposes, powers, and duties of the Michigan education

savings program are vested in and shall be exercised by the

treasurer or the designee of the treasurer.

(4) The state treasurer shall administer the Michigan

education savings program and shall be the trustee for the funds of

the Michigan education savings program. The treasurer may use

program revenues to maintain or enhance the state's qualified

tuition programs.

(5) The treasurer may employ or contract with personnel and

contract for services necessary for the administration of each

savings plan under the program and the investment of the assets of

each savings plan under the program including, but not limited to,

managerial, professional, legal, clerical, technical, and

administrative personnel or services.

(6) When selecting a program manager, the treasurer shall give

preference to proposals from single entities that propose to

provide all of the functions described in subsection (5) and that

demonstrate the most advantageous combination, to both potential

participants and this state, of the following factors and the

management contract shall address these factors:

(a) Financial stability.

(b) The safety of the investment instruments being offered.

increasing costs of higher education.

(d) The ability of the entity to satisfy the record-keeping

and reporting requirements of this act.

(e) The entity's plan for marketing the ~~program~~ savings plan

and the investment it is willing to make to promote the ~~program~~

savings plan.

(f) The fees, if any, proposed to be charged to persons for

opening or maintaining an account.

(g) The minimum initial deposit and minimum contributions that

the entity will require which, for the first year of the ~~program~~

savings plan, shall not be greater than $25.00 for a cash

contribution or $15.00 per pay period for payroll deduction plans.

(h) The ability of the entity to accept electronic

withdrawals, including payroll deduction plans.

(7) The treasurer shall enter into a contract with ~~the~~ each

program manager which shall address the respective authority and

responsibility of the treasurer and the program manager to do all

of the following:

(a) Develop and implement the savings plan or plans offered

under the program.

(b) Invest the money received from account owners in 1 or more

investment instruments.

to provide professional and technical assistance and advice.

(d) Determine the use of financial organizations as account

depositories and financial managers.

(e) Charge, impose, and collect annual administrative fees and

service in connection with any agreements, contracts, and

transactions relating to individual accounts, exclusive of initial

sales charges, which shall not exceed 1.5% of the average daily net

assets of the account.

(f) Develop marketing plans and promotional material.

(g) Establish the methods by which funds are allocated to pay

for administrative costs.

(h) Provide criteria for terminating and not renewing the

management contract.

(i) Address the ability of the program manager to take any

action required to keep the savings plan or plans offered under the

program in compliance with requirements of this act and its

management contract and to manage the savings plan or plans offered

under the program to qualify as a qualified tuition program under

section 529 of the internal revenue code.

(j) Keep adequate records of each account and provide the

treasurer with information that the treasurer requires related to

those records.

(k) Compile the information contained in statements required

to be prepared under this act and provide that compilation to the

treasurer in a timely manner.

(l) Hold all accounts for the benefit of the account owner.

(m) Provide for audits at least annually by a firm of

certified public accountants.

(n) Provide the treasurer with copies of all regulatory

filings and reports related to the savings plan or plans offered

under the program made during the term of the management contract

or while the program manager is holding any accounts, other than

confidential filings or reports except to the extent those filings

or reports are related to or are a part of the savings plan or

plans offered under the program. It is the responsibility of the

program manager to make available for review by the treasurer the

results of any periodic examination of the program manager by any

state or federal banking, insurance, or securities commission,

except to the extent that the report or reports are not required to

be disclosed under state or federal law.

(o) Ensure that any description of the savings plan or plans

offered under the program, whether in writing or through the use of

any media, is consistent with the marketing plan developed by the

program manager.

(p) Take any other necessary and proper activities to carry

out the purposes of this act.

Sec. 4. The treasurer shall be responsible for the ongoing

supervision of ~~the~~ each management contract in consultation with

the board.

Sec. 5. (1) ~~The~~ A management contract shall be for a term of

years specified in the management contract.

(2) The treasurer may terminate ~~the~~ a management contract

based on the criteria specified in the management contract.

Sec. 7. (1) Beginning October 1, 2000, education savings

accounts may be established under this act.

(2) Any individual or entity described in section 2(b)(ii) may

open 1 or more education savings accounts to save money to pay the

qualified higher education expenses of 1 or more designated

beneficiaries. An account owner shall open only 1 account for any 1

designated beneficiary. Each account opened under this act shall

have only 1 designated beneficiary.

(3) To open an education savings account, the individual or

entity described in section 2(b)(ii) shall enter into a Michigan

education savings program agreement with the program. The Michigan

education savings program agreement shall be in the form prescribed

by ~~the~~ a program manager and approved by the treasurer and contain

all of the following:

(a) The name, address, and social security number or employer

identification number of the account owner.

(b) A designated beneficiary.

designated beneficiary.

(d) Any other information that the treasurer or program

manager considers necessary.

(4) Any individual or entity described in section 2(b)(ii) may

make contributions to an account.

(5) Contributions to accounts shall only be made in cash, by

check, by money order, by credit card, or by any similar method as

approved by the state treasurer but shall not be property.

(6) An account owner may withdraw all or part of the balance

from an account on 60 days' notice, or a shorter period as

authorized in the Michigan education savings program agreement.

(7) Distributions from an account shall be requested on a form

approved by the state treasurer. ~~The~~ A program manager may retain

from the distribution the amount necessary to comply with federal

and state tax laws. Distributions may be made in the following

manner:

(a) Directly to an eligible education institution.

(b) In the form of a check payable to both the designated

beneficiary and the eligible educational institution.

beneficiary or account holder.

(8) Except as otherwise provided in this subsection for tax

years that begin before January 1, 2002, if the distribution is not

a qualified withdrawal, ~~the~~ a program manager shall withhold an

amount equal to 10% of the distribution amount as a penalty and pay

that amount to the department for deposit into the general fund.

For a distribution made after December 31, 2001 that is not a

qualified withdrawal, if an excise tax or penalty is imposed under

section 529 of the internal revenue code pursuant to section

530(d)(4) of the internal revenue code, a penalty shall not be

imposed under this subsection for that distribution. If a

distribution that is not a qualified withdrawal is made after

December 31, 2001 and an excise tax or penalty is not imposed under

section 529 of the internal revenue code pursuant to section

530(d)(4) of the internal revenue code on that distribution, ~~the~~ a

program manager shall withhold an amount equal to 10% of the

accumulated earnings attributable to that distribution amount as a

penalty and pay that amount to the department for deposit into the

general fund. The penalty under this subsection may be increased or

decreased if the treasurer and the program manager determine that

it is necessary to increase or decrease the penalty to comply with

section 529 of the internal revenue code.

(9) ~~The~~ Each savings plan under the program shall provide

separate accounting for each designated beneficiary.

Sec. 9. (1) Except as otherwise provided in this section, an

account owner or a designated beneficiary of any account shall not

direct the investment of any contributions to an account or the

earnings on an account.

(2) An account owner may select among different investment

strategies designed ~~exclusively~~ by ~~the~~ a program manager in all of

the following circumstances to the extent allowed under section 529

of the internal revenue code:

(a) At the time any contribution is made to an account with

respect to the amount of that contribution.

(b) Once each calendar year with respect to the accumulated

account balance.

beneficiary of an account.

(3) The program may allow board members or employees of the

program, or the board members or employees of a contractor hired by

the program to perform administrative services, to make

contributions to an account.

(4) An interest in an account shall not be used by an account

owner or a designated beneficiary as security for a loan. Any

pledge of an interest in an account has no force or effect.

Sec. 11. (1) ~~The~~ Each program manager shall report

distributions from an account to any individual or for the benefit

of any individual during a tax year to the internal revenue service

and the account owner or, to the extent required by federal law or

regulation, to the distributee.

(2) ~~The~~ Each program manager shall provide statements that

identify the individual contributions made during the tax year, the

total contributions made to the account for the tax year, the value

of the account at the end of the tax year, distributions made

during the tax year, and any other information that the treasurer

requires to each account owner on or before the January 31

following the end of each calendar year.

Sec. 12. ~~The~~ Each program manager shall disclose the following

information in writing to each account owner of an education

savings account and any other person who requests information about

an education savings account:

(a) The terms and conditions for establishing an education

savings account.

(b) Restrictions on the substitutions of designated

beneficiaries and transfer of account funds.

education savings program agreement.

(d) The period of time during which a designated beneficiary

may receive benefits under the Michigan education savings program

agreement.

(e) The terms and conditions under which money may be wholly

or partially withdrawn from an account or the program, including,

but not limited to, any reasonable charges and fees and penalties

that may be imposed for withdrawal.

(f) The potential tax consequences associated with

contributions to and distributions and withdrawals from accounts.

(g) Investment history and potential growth of account funds

and a projection of the impact of the growth of the account funds

on the maximum amount allowable in an account.

(h) All other rights and obligations under Michigan education

savings program agreements and any other terms, conditions, and

provisions of a contract or an agreement entered into under this

act.

Sec. 15. ~~The~~ Each program manager shall file an annual report

with the treasurer and the board that includes all of the

following:

(a) The names and identification numbers of account owners,

designated beneficiaries, and distributees of family tuition

accounts. The information reported pursuant to this subdivision is

not subject to the freedom of information act, 1976 PA 442, MCL

15.231 to 15.246.

(b) The total amount contributed to all accounts during the

year.

each distribution was a qualified withdrawal.

(d) Any information that the program manager or treasurer may

require regarding the taxation of amounts contributed to or

withdrawn from accounts.