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H.B. 369 Enrolled

    

HIGHER EDUCATION SUPPLEMENTAL

    
SAVINGS INCENTIVE PROGRAM

    
1997 GENERAL SESSION

    
STATE OF UTAH

    
Sponsor: Kevin S. Garn

    Brent H. Goodfellow




    AN ACT RELATING TO HIGHER EDUCATION; CREATING THE UTAH SUPPLEMENTAL
    EDUCATIONAL SAVINGS TRUST AS A MEANS TO ENCOURAGE INVESTMENT
    IN A PUBLIC TRUST TO PAY FOR FUTURE HIGHER EDUCATION COSTS;
    PROVIDING DEFINITIONS; PROVIDING FOR THE ADMINISTRATION AND
    MANAGEMENT OF THE TRUST; PROVIDING FOR PARTICIPATION
    AGREEMENTS AND DETAILING THEIR CONTENT; PROVIDING FOR
    OWNERSHIP OF CONTRIBUTIONS AND EARNINGS; PROVIDING FOR AN
    ANNUAL AUDITED FINANCIAL REPORT; PROVIDING FOR TAX
    CONSIDERATIONS; PROVIDING FOR RETROSPECTIVE OPERATION; AND
    PROVIDING AN EFFECTIVE DATE.
    This act affects sections of Utah Code Annotated 1953 as follows:
    AMENDS:
         59-10-201, as last amended by Chapter 4, Laws of Utah 1996, Second Special Session
    ENACTS:
         53B-8b-101, Utah Code Annotated 1953
         53B-8b-102, Utah Code Annotated 1953
         53B-8b-103, Utah Code Annotated 1953
         53B-8b-104, Utah Code Annotated 1953
         53B-8b-105, Utah Code Annotated 1953
         53B-8b-106, Utah Code Annotated 1953
         53B-8b-107, Utah Code Annotated 1953
         53B-8b-108, Utah Code Annotated 1953
         53B-8b-109, Utah Code Annotated 1953


         53B-8b-110, Utah Code Annotated 1953
         53B-8b-111, Utah Code Annotated 1953
         53B-8b-112, Utah Code Annotated 1953
         59-10-901, Utah Code Annotated 1953
    Be it enacted by the Legislature of the state of Utah:
        Section 1. Section 53B-8b-101 is enacted to read:
    
CHAPTER 8b. HIGHER EDUCATION SUPPLEMENTAL SAVINGS

    
INCENTIVE PROGRAM

         53B-8b-101. Purpose.
        (1) The Legislative findings in Section 53B-8a-101 apply to this chapter.
        (2) Further, the Legislature finds that the opportunity to create additional means to encourage
    investment in a public trust for future application to the payment of higher education costs exists
    under Section 529, Internal Revenue Code.
        Section 2. Section 53B-8b-102 is enacted to read:
         53B-8b-102. Definitions.
        As used in this chapter:
        (1) "Administrative fund" means the moneys used to administer the Utah Supplemental
    Educational Savings Plan Trust.
        (2) "Benefits" means the payment of a qualified higher education expense as defined in
    Section 529(e)(3) of the Code.
        (3) "Board" means the board of directors of the Utah Supplemental Educational Savings Plan
    Trust, which is the state board of regents acting in its capacity as the Utah Higher Education
    Assistance Authority under Title 53B, Chapter 12.
        (4) "Code" means the Internal Revenue Code.
        (5) "Designated beneficiary" has the same meaning as defined in Section 529(e)(1) of the
    Code.
        (6) "Endowment fund" means the endowment fund established under Section 53B-8a-107.
        (7) "Participant" means any individual, firm, corporation, or other person who has entered

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    into a participation agreement under this chapter for the investment of money in the trust on behalf
    of one or more designated beneficiaries.
        (8) "Participant account" means each individual account, one per designated beneficiary,
    under each participation agreement.
        (9) "Participation agreement" means an agreement between a participant and the trust
    entered into under this chapter.
        (10) "Program administrator" means the administrator of the trust, appointed by the board
    to administer and manage the trust.
        (11) "Program fund" means the assets of the trust, other than those in the administrative
    fund.
        (12) "Qualified higher education expenses" means expenses as defined by the board to be
    in conformity with Section 529 of the Code.
        (13) "Utah Supplemental Educational Savings Plan Trust" or "trust" means the trust created
    under Section 53B-8b-103.
        Section 3. Section 53B-8b-103 is enacted to read:
         53B-8b-103. Creation of Utah Supplemental Educational Savings Plan Trust.
        (1) There is created the Utah Supplemental Educational Savings Plan Trust.
        (2) The board is the trustee of the trust.
        (3) The trust may be made operational at the discretion of the board, upon the board's
    determination that adequate fiduciary and administrative provisions have been established.
        (4) The board, in its capacity as trustee, may:
        (a) exercise any authority granted by law to the board of regents;
        (b) make and enter into contracts necessary for the administration of the trust created under
    this chapter;
        (c) adopt a corporate seal and change and amend it from time to time;
        (d) invest moneys within the program fund, consistent with the best interests of a designated
    beneficiary's higher education funding needs, in mutual funds registered under the Investment
    Company Act of 1940 in compliance with the State Money Management Council rules applicable

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    to gift funds;
        (e) enter into agreements with any institution of higher education, the state, or any federal
    or other state agency or other entity as required for the effectuation of its rights and duties under this
    chapter;
        (f) enter into participation agreements with participants;
        (g) make payments to institutions of higher education, participants, and designated
    beneficiaries under participation agreements;
        (h) appoint a program administrator and determine the duties of the program administrator
    and other staff as necessary and fix their compensation;
        (i) make provision for the payment of costs of administration and operation of the trust; and
        (j) carry out the duties and obligations of the trust under this chapter, and exercise authority
    as necessary to ensure that the use of the trust and all related activities constitute a qualified state
    tuition program under Section 529 of the Code.
        Section 4. Section 53B-8b-104 is enacted to read:
         53B-8b-104. Additional powers of board as to the trust.
        The board has the power to carry out and effectuate the purposes, objectives, and provisions
    of this chapter, including the power to:
        (1) engage:
         (a) one or more investment advisors, registered under the Investment Advisors Act of 1940,
    with at least 5,000 advisory clients and at least $1,000,000,000 under management, to provide
    investment advice to the board with respect to the assets held in each participant account;
        (b) an administrator to perform recordkeeping functions on behalf of the trust; and
        (c) one or more consultants to design and implement a marketing program for the trust;
        (2) engage a consultant to carry out studies and projections in order to advise participants
    regarding present and estimated future higher education costs and levels of financial participation
    in the trust required to enable participants to achieve their educational funding objectives and to
    provide a basis for limiting contributions to the trust to ensure that it does not fail to qualify as a
    qualified state tuition program under Section 529 of the Code;

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        (3) contract for goods and services and engage personnel as necessary, including consultants,
    actuaries, managers, counsel, and auditors to render professional, managerial, and technical
    assistance and advice, all of which contract obligations and services shall be payable from any
    moneys of the trust;
        (4) engage a custodian for the safekeeping of the assets of the trust;
        (5) in the interests of efficiency of administration, engage a single contractor responsible for
    furnishing or obtaining or both furnishing and obtaining the services described in Subsections (1),
    (2), and (3), and any other services necessary for the efficient administration of the trust;
        (6) participate in any other way in any federal, state, or local governmental program for the
    benefit of the trust;
        (7) promulgate, impose, and collect administrative fees and charges in connection with
    transactions of the trust, and provide for reasonable service charges, including penalties for
    cancellations of and late payments on participation agreements;
        (8) procure insurance against any loss in connection with the property, assets, or activities
    of the trust;
        (9) procure insurance indemnifying any member of the board from personal loss or
    accountability arising from liability resulting from a member's action or inaction as a member of the
    board; and
        (10) make rules and regulations for the administration of the trust.
        Section 5. Section 53B-8b-105 is enacted to read:
         53B-8b-105. Participation agreements -- Content.
        (1) Each participation agreement shall provide for the payment of qualified higher education
    expenses of the eligible beneficiary of the participation agreement.
        (2) The trust has authority to enter into participation agreements with participants on behalf
    of designated beneficiaries under the following terms and agreements:
        (a) each participation agreement may include one or more designated beneficiaries, and for
    each designated beneficiary have a participant account, which the trust shall account for separately;
        (b) (i) each participation agreement shall require a participant to agree to invest at least:

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        (A) $2,500 initially and not less than $100 per month from the date of the participation
    agreement until at least the 16th birthday of the youngest designated beneficiary; or
        (B) $10,000 initially;
        (ii) the program administrator may increase these minimums at his discretion;
        (c) each participation agreement shall state clearly that there are no guarantees regarding
    moneys in the trust, either as to earnings or as to return of principal, but that the value of each
    participant account depends on the performance of the mutual funds chosen by the investment
    advisor and the fees and charges under the participation agreement;
        (d) the participation agreement does not guarantee in any way that higher education costs
    will be equal to projections and estimates provided by the trust or that any designated beneficiary
    named in any participation agreement will:
        (i) be admitted to an institution of higher education;
        (ii) if admitted, be determined a resident for tuition purposes by the institution;
        (iii) be allowed to continue attendance at the institution following admission; or
        (iv) graduate from an institution of higher education;
        (e) each participation agreement shall include provisions necessary to comply with Section
    529 of the Code;
        (f) each participation agreement shall provide that any contributor to, or designated
    beneficiary under, the participation agreement may not direct the investment of any contributions
    or earnings on contributions;
        (g) each participation agreement shall provide that no part of the money in any participant
    account may be used as security for a loan;
        (h) each participation agreement shall provide that the participant may withdraw moneys
    from any participant account at any time;
        (i) each participation agreement may provide for a reasonable fee, consisting of two parts:
        (i) the first, an annual administrative charge payable to the administrative fund, assessed
    against the assets held under the participation agreement, not to exceed $50 annually; and
        (ii) the second, a daily charge deducted from the assets of the program fund at a rate

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    equivalent to an annual effective rate of not more than .50%, no more than .25% of which shall be
    payable to the administrative fund, and no more than .25% of which shall be payable to the
    investment advisor for the trust;
        (j) each participation agreement shall provide that if a designated beneficiary graduates from
    an institution of higher education and a balance remains in the participation account established for
    the beneficiary, then the participant shall notify the program administrator and request an immediate
    refund of the remaining balance;
        (k) each participation agreement shall provide that no participant may borrow from the trust;
    and
        (l) each participation agreement shall provide that, notwithstanding any other provision of
    law, the program administrator may amend the agreement unilaterally and retroactively, if necessary,
    to maintain the trust as a qualified state tuition program under Section 529 of the Code.
        Section 6. Section 53B-8b-106 is enacted to read:
         53B-8b-106. Program and administrative funds -- Transfer between funds.
        (1) The board shall segregate moneys received by the trust into two funds, the program fund
    and the administrative fund.
        (2) Transfers may be made from the administrative fund to the endowment fund.
        (3) Transfers may be made from the program fund to the administrative fund for the purpose
    of paying operating costs associated with administering the trust and as otherwise required under this
    chapter.
        Section 7. Section 53B-8b-107 is enacted to read:
         53B-8b-107. Ownership of contributions and earnings.
        (1) All amounts in the program fund are to be held in trust for the benefit of each participant
    and each designated beneficiary.
        (2) The institution of higher education shall obtain ownership of the payments made to it for
    the higher education costs paid to it at the time each payment is made.
        Section 8. Section 53B-8b-108 is enacted to read:
         53B-8b-108. Effect of payments on determination of need and eligibility for student aid.

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        A student loan program, student grant program, or other program administered by any agency
    of the state, except as otherwise provided by federal law or any specific grant applicable to that law,
    may not take into account and consider amounts available for the payment of higher education costs
    under this chapter in determining need and eligibility for student aid.
        Section 9. Section 53B-8b-109 is enacted to read:
         53B-8b-109. Annual audited financial report.
        (1) The board shall submit an annual audited financial report, prepared in accordance with
    generally accepted accounting principles, on the operations of the trust by November 1 to the
    governor, the Legislature's Education Interim Committee, and the state auditor.
        (2) The annual audit shall be made either by the state auditor or by an independent certified
    public accountant designated by the state auditor and shall include direct and indirect costs
    attributable to the use of outside consultants, independent contractors, and any other persons who
    are not state employees.
        (3) The board shall supplement the annual audit with the following information prepared by
    the board:
        (a) studies or evaluations prepared in the preceding year;
        (b) a summary of the benefits provided by the trust, including the number of participants and
    designated beneficiaries under the trust; and
        (c) any other information which is relevant in order to make a full, fair, and effective
    disclosure of the operations of the trust.
        Section 10. Section 53B-8b-110 is enacted to read:
         53B-8b-110. Tax considerations.
        For tax purposes the property of the trust and its income are governed by Section 59-10-901.
        Section 11. Section 53B-8b-111 is enacted to read:
         53B-8b-111. Property rights to assets in trust.
        (1) The assets of the trust, including the program fund and the administrative fund, shall at
    all times be preserved, invested, and expended solely for the purposes of the trust and shall be held
    in trust for the participants and designated beneficiaries.

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        (2) The state has no property rights in the assets of the trust.
        (3) The state may not transfer or use the trust assets for any purpose other than the purposes
    of the trust.
        Section 12. Section 53B-8b-112 is enacted to read:
         53B-8b-112. Liberal construction.
        (1) This chapter shall be construed liberally in order to effectuate its legislative intent.
        (2) The purposes of this chapter with respect to powers granted shall be broadly interpreted
    to effectuate that intent and not to limit any powers of the board or the program administrator.
        Section 13. Section 59-10-201 is amended to read:
         59-10-201. Taxation of resident trusts and estates.
        (1) A tax determined in accordance with the rates prescribed by Section 59-10-104 for
    individuals filing separately is imposed for each taxable year on the state taxable income of each
    resident estate or trust, except for trusts taxed as corporations.
        (2) A resident estate or trust shall be allowed the credit provided in Section 59-10-106,
    relating to an income tax imposed by another state, except that the limitation shall be computed by
    reference to the taxable income of the estate or trust.
        (3) The property of the [trust] trusts established in Title 53B, Chapter 8a, Higher Education
    Savings Incentive Program, and Chapter 8b, Higher Education Supplemental Savings Incentive
    Program, and [its] their income from operations and investments are exempt from all taxation by the
    state under this chapter.
        Section 14. Section 59-10-901 is enacted to read:
    
Part 9. Utah Supplemental Educational Savings Plan Trust

         59-10-901. Tax considerations for Utah Supplemental Educational Savings Plan Trust.
        (1) (a) A contribution to the Utah Supplemental Educational Savings Plan Trust created
    under Section 53B-8b-103 on behalf of a designated beneficiary is not a taxable gift.
        (b) Income tax is due on investment gains from the trust at the time the gains are actually
    distributed.
        (c) At the time of a distribution, any amounts used to pay for qualified higher education

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    expenses shall be taxed to the designated beneficiary on whose behalf the amounts are distributed.
        (2) The tax commission, in consultation with the board, may adopt rules necessary to
    monitor and implement Subsection (1) as related to the property of the trust and its investment gains
    and losses.
        Section 15. Retrospective operation.
          Section 59-10-201 has retrospective operation for taxable years beginning on or after January
    1, 1997 .
        Section 16. Effective date.
        This act takes effect on July 1, 1997.

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