CHAPTER 23 HOUSE BILL No. 2655 AN  ACT concerning the Kansas postsecondary education savings program; amending
K.S.A. 1999 Supp. 75-643, 75-646 and 79-32,117 and repealing the existing sections. Be it enacted by the Legislature of the State of Kansas:

      Section  1. K.S.A. 1999 Supp. 75-643 is hereby amended to read as
follows: 75-643. As used in K.S.A. 1999 Supp. 75-640 to 75-648, and
amendments thereto:

      (a) ``Account'' or ``family postsecondary education savings account''
means an individual savings account established in accordance with the
provisions of K.S.A. 1999 Supp. 75-640 to 75-648, and amendments
thereto.

      (b) ``Account owner'' means the individual or individuals person or
persons who enter into a postsecondary education savings agreement pur-
suant to the provisions of K.S.A. 1999 Supp. 75-640 to 75-648, and
amendments thereto. If the account is owned by one individual, the ac-
count owner may also be the designated beneficiary of the account.

      (c) ``Designated beneficiary'' means, with respect to an account, the
individual designated at the time the account is established as the indi-
vidual whose higher education expenses are expected to be paid from the
account or in the case of a change in beneficiaries, the individual who is
the new beneficiary.

      (d) ``Financial organization'' means an organization authorized to do
business in the state of Kansas and (1) which is an authorized fiduciary
to act as a trustee pursuant to the provisions of the federal employee
retirement income security act of 1974, an insurance company, or a reg-
istered investment advisor; and (2) (A) is licensed or chartered by the
commissioner of insurance, (B) is licensed or chartered by the state bank
commissioner, (C) is chartered by an agency of the federal government,
(D) is subject to the jurisdiction and regulation of the securities and
exchange commission of the federal government, or (E) is any other entity
otherwise authorized to act in this state as a trustee pursuant to the pro-
visions of the federal employee retirement income security act of 1974.

      (e) ``Institution of postsecondary education'' means any institution of
postsecondary education which is accredited by a nationally recognized
accrediting agency or association, offers credit toward an undergraduate
or graduate degree or other recognized postsecondary education creden-
tial, and qualifies as an eligible institution for federal student aid pro-
grams.

      (f) ``Member of the family'' has the meaning ascribed thereto in sec-
tion 529 of the federal internal revenue code of 1986, as amended.

      (g) ``Program'' means the Kansas postsecondary education savings
program established pursuant to K.S.A. 1999 Supp. 75-640 to 75-648, and
amendments thereto.

      (h) ``Qualified higher education expenses'' means any qualified higher
education expense included in section 529 of the federal internal revenue
code of 1986, as amended.

      (i) ``Qualified withdrawal'' means a withdrawal from an account to
pay the qualified higher education expenses of the designated beneficiary
of the account.

      (j) ``Nonqualified withdrawal'' means a withdrawal from an account
but does not mean:

      (1) A qualified withdrawal;

      (2) a withdrawal made as the result of the death or disability of the
designated beneficiary of an account; or

      (3) a withdrawal made on the account of a scholarship received by
the designated beneficiary to the extent the amount of the withdrawal
does not exceed the amount of the scholarship; or

      (4) a rollover distribution.

      (k) ``Rollover distribution'' means a rollover distribution as defined in
section 529 of the federal internal revenue code of 1986, as amended, and
regulations thereunder.

      (k) (l) ``Treasurer'' means the state treasurer.

      (l) (m) ``Management contract'' means the contract executed by the
treasurer and a financial organization selected to act as a depository and
manager of the program.

      (m) (n) ``Postsecondary education savings agreement'' means an
agreement between the state treasurer and the account owner or owners.

      (n) (o) ``Program manager'' means a financial organization selected
by the treasurer to act as a depository and manager of the program.

      Sec.  2. K.S.A. 1999 Supp. 75-646 is hereby amended to read as fol-
lows: 75-646. (a) Family postsecondary education savings accounts estab-
lished pursuant to the provisions of K.S.A. 1999 Supp. 75-640 to 75-648,
and amendments thereto shall be governed by the provisions of this sec-
tion.

      (b) A family postsecondary education savings account may be opened
by any person or persons who desire to save money for the payment of
the qualified higher education expenses of the designated beneficiary.
Such persons shall be considered the account owner.

      (1) An application for such account shall be in the form prescribed
by the state treasurer and contain the following:

      (A) The name, address and social security number or employer iden-
tification number of the account owner or owners;

      (B) the designation of a designated beneficiary;

      (C) the name, address and social security number of the designated
beneficiary;

      (D) the certification relating to no excess contributions; and

      (E) such other information as the state treasurer may require.

      (2) The state treasurer shall may establish a nominal nonrefundable
application fee for such application.

      (c) Only the account owner or owners may make contributions to the
account after the account is opened.

      (d) Contributions to accounts may be made only in cash.

      (e) An account owner may withdraw all or part of the balance from
an account on sixty-days notice or such shorter period as may be author-
ized under rules and regulations governing the program. Such rules and
regulations shall include provisions that will generally enable the deter-
mination as to whether a withdrawal is a nonqualified withdrawal or a
qualified withdrawal. Such rules and regulations may require one or more
of the following:

      (1) An account owner seeking to make a qualified withdrawal must
provide certification of qualified higher education expenses in a form and
manner and pursuant to the method consistent with the requirements of
K.S.A. 1999 Supp. 75-640 to 75-648, and amendments thereto; and

      (2) withdrawals not meeting the requirements of K.S.A. 1999 Supp.
75-640 to 75-648, and amendments thereto shall be treated as nonqual-
ified withdrawals by the program manager and if such withdrawals are
subsequently deemed qualified withdrawals, the account owner must seek
any refund of penalties directly from the program.

      (f)  (1) An account owner may change the designated beneficiary of
an account to an individual who is a member of the family of the prior
designated beneficiary in accordance with procedures established pur-
suant to the provisions of K.S.A. 1999 Supp. 75-640 to 75-648, and
amendments thereto.

      (2) An account owner may transfer all or a portion of an account to
another family postsecondary education savings account, the designated
beneficiary of which is a member of the family as defined in section 529
of the federal internal revenue code of 1986, as amended.

      (3) Changes in designated beneficiaries and transfers under this sub-
section shall not be permitted to the extent that they would constitute
excess contributions or unauthorized investment choices.

      (g) In the case of any nonqualified withdrawal from an account, an
amount equal to 15% 10% of the portion of the withdrawal constituting
income earnings as determined in accordance with the principles of sec-
tion 529 of the federal internal revenue code of 1986, as amended, plus
an amount equal to the amount of interest earned on such portion shall
be withheld as a penalty and paid to the Kansas postsecondary education
savings program.

      (h) The penalty prescribed in subsection (g) may be increased if the
state treasurer determines that the amount of such penalty must be in-
creased to constitute a greater than de minimis penalty for purposes of
qualifying the program as a qualified state tuition program as defined in
section 529 of the federal internal revenue code of 1986, as amended.

      (i) If an account owner makes a nonqualified withdrawal and no pen-
alty amount is withheld pursuant to subsection (g) or the amount withheld
was less than the amount required to be withheld under such subsection
for nonqualified withdrawals, the account owner shall pay the unpaid
portion of the penalty to the program at the same time that the account
owner files the earlier of the account owner's state or federal income tax
return for the taxable year of the withdrawal or if such account owner
does not file such return, the due date for such returns but in any event
on or before the due date for such return taking into account any au-
thorized extensions.

      (j) The program shall provide separate accounting for each desig-
nated beneficiary.

      (k) No account owner or designated beneficiary of any account shall
be permitted to direct the investment of any contributions to an account
or the earnings thereon.

      (l) Neither an account owner nor a designated beneficiary may use
an interest in an account as security for a loan. Any pledge of an interest
in an account shall be of no force and effect.

      (m)  (1) The state treasurer shall adopt rules and regulations to prevent
contributions on behalf of a designated beneficiary in excess of an amount
equal to the average amount of the qualified higher education expenses
that would be incurred for five years of study at institutions of postse-
condary education located in the midwest states. Such amount shall be
determined annually by the state treasurer.

      (2) Such rules and regulations shall include requirements that any
excess balance contributions with respect to a designated beneficiary be
promptly withdrawn in a nonqualified withdrawal or transferred to an-
other account.

      (n)  (1) If there is any distribution from an account to any individual
or for the benefit of any individual during a calendar year, such distri-
bution shall be reported to the federal internal revenue service and the
account owner or owners, the designated beneficiary, or the distributee
to the extent required by federal law or regulation.

      (2) Statements shall be provided to each account owner at least once
each year within 60 days after the end of the twelve-month period to
which they relate. The statement shall identify the contributions made
during a preceding twelve-month period, the total contributions made to
the account through the end of the period, the value of the account at
the end of such period, distributions made during such period and any
other information that the state treasurer shall require to be reported to
the account owner.

      (3) Statements and information relating to accounts shall be prepared
and filed to the extent required by federal and state tax law.

      (o)  (1) A state or local government, or agency or instrumentality
thereof, or organization described in section 501(c) (3) of the federal
internal revenue code of 1986, as amended, may open and become the
account owner of an account to fund scholarships for persons whose iden-
tity will be determined upon disbursement.

      (2) In the case of any account opened pursuant to provision (1) of
this subsection, the requirement set forth in subsection (b) that a desig-
nated beneficiary be designated when an account is opened shall not
apply and each individual who receives an interest in such account as a
scholarship shall be treated as a designated beneficiary with respect to
such interest.

      (p) An annual fee may be imposed upon the account owner or owners
for the maintenance of the account.

      (q) An account must be opened before the designated beneficiary
attains 25 years of age and open at least two calendar years before a
qualified withdrawal can be made. Qualified withdrawals must be com-
pleted by the time the designated beneficiary attains 30 years of age or
within 10 years after the initial qualified withdrawal is made, whichever
occurs first. The state treasurer may adopt rules and regulations providing
for exceptions to the foregoing requirements for such extenuating cir-
cumstances as the state treasurer deems necessary and appropriate.

      (r) An account owner or designated beneficiary of a Kansas postse-
condary education savings account may be a resident of any state but
must be a resident citizen or resident of the United States of America.

      (s) The program shall disclose the following information in writing to
each account owner and prospective account owner of a family postse-
condary education savings account:

      (1) The terms and conditions for purchasing a family postsecondary
education savings account;

      (2) any restrictions on the substitution of beneficiaries;

      (3) the person or entity entitled to terminate the savings agreement;

      (4) the period of time during which a beneficiary may receive benefits
under the savings agreement;

      (5) the terms and conditions under which money may be wholly or
partially withdrawn from the program, including, but not limited to, any
reasonable charges and fees that may be imposed for withdrawal;

      (6) the probable tax consequences associated with contributions to
and distributions from accounts; and

      (7) all other rights and obligations pursuant to savings agreements,
and any other terms, conditions and provisions deemed necessary and
appropriate by the state treasurer.

      (t) Nothing in K.S.A. 1999 Supp. 75-640 to 75-648, and amendments
thereto, or in any savings agreement entered into pursuant to K.S.A. 1999
Supp. 75-640 to 75-648, and amendments thereto, shall be construed as
a guarantee by the state of Kansas or any institution of postsecondary
education that a beneficiary will be admitted to the institution of postse-
condary education or, upon admission to any institution of postsecondary
education, will be permitted to continue to attend or will receive a degree
from such institution of postsecondary education.

      Sec.  3. K.S.A. 1999 Supp. 79-32,117 is hereby amended to read as
follows: 79-32,117. (a) The Kansas adjusted gross income of an individual
means such individual's federal adjusted gross income for the taxable year,
with the modifications specified in this section.

      (b) There shall be added to federal adjusted gross income:

      (i) Interest income less any related expenses directly incurred in the
purchase of state or political subdivision obligations, to the extent that
the same is not included in federal adjusted gross income, on obligations
of any state or political subdivision thereof, but to the extent that interest
income on obligations of this state or a political subdivision thereof issued
prior to January 1, 1988, is specifically exempt from income tax under the
laws of this state authorizing the issuance of such obligations, it shall be
excluded from computation of Kansas adjusted gross income whether or
not included in federal adjusted gross income. Interest income on obli-
gations of this state or a political subdivision thereof issued after Decem-
ber 31, 1987, shall be excluded from computation of Kansas adjusted
gross income whether or not included in federal adjusted gross income.

      (ii) Taxes on or measured by income or fees or payments in lieu of
income taxes imposed by this state or any other taxing jurisdiction to the
extent deductible in determining federal adjusted gross income and not
credited against federal income tax. This paragraph shall not apply to taxes
imposed under the provisions of K.S.A. 79-1107 or 79-1108, and amend-
ments thereto, for privilege tax year 1995, and all such years thereafter.

      (iii) The federal net operating loss deduction.

      (iv) Federal income tax refunds received by the taxpayer if the de-
duction of the taxes being refunded resulted in a tax benefit for Kansas
income tax purposes during a prior taxable year. Such refunds shall be
included in income in the year actually received regardless of the method
of accounting used by the taxpayer. For purposes hereof, a tax benefit
shall be deemed to have resulted if the amount of the tax had been de-
ducted in determining income subject to a Kansas income tax for a prior
year regardless of the rate of taxation applied in such prior year to the
Kansas taxable income, but only that portion of the refund shall be in-
cluded as bears the same proportion to the total refund received as the
federal taxes deducted in the year to which such refund is attributable
bears to the total federal income taxes paid for such year. For purposes
of the foregoing sentence, federal taxes shall be considered to have been
deducted only to the extent such deduction does not reduce Kansas tax-
able income below zero.

      (v) The amount of any depreciation deduction or business expense
deduction claimed on the taxpayer's federal income tax return for any
capital expenditure in making any building or facility accessible to the
handicapped, for which expenditure the taxpayer claimed the credit al-
lowed by K.S.A. 79-32,177, and amendments thereto.

      (vi) Any amount of designated employee contributions picked up by
an employer pursuant to K.S.A. 12-5005, 20-2603, 74-4919 and 74-4965,
and amendments to such sections.

      (vii) The amount of any charitable contribution made to the extent
the same is claimed as the basis for the credit allowed pursuant to K.S.A.
79-32,196, and amendments thereto.

      (viii) The amount of any costs incurred for improvements to a swine
facility, claimed for deduction in determining federal adjusted gross in-
come, to the extent the same is claimed as the basis for any credit allowed
pursuant to K.S.A. 1999 Supp. 79-32,204 and amendments thereto.

      (ix) The amount of any ad valorem taxes and assessments paid and
the amount of any costs incurred for habitat management or construction
and maintenance of improvements on real property, claimed for deduc-
tion in determining federal adjusted gross income, to the extent the same
is claimed as the basis for any credit allowed pursuant to K.S.A. 79-32,203
and amendments thereto.

      (x) Amounts received as nonqualified withdrawals, as defined by
K.S.A. 1999 Supp. 75-643, and amendments thereto, if, at the time of
contribution to a family postsecondary education savings account, such
amounts were subtracted from the federal adjusted gross income pursuant
to paragraph (xv) of subsection (c) of K.S.A. 79-32,117, and amendments
thereto, or if such amounts are not already included in the federal adjusted
gross income.

      (c) There shall be subtracted from federal adjusted gross income:

      (i) Interest or dividend income on obligations or securities of any
authority, commission or instrumentality of the United States and its pos-
sessions less any related expenses directly incurred in the purchase of
such obligations or securities, to the extent included in federal adjusted
gross income but exempt from state income taxes under the laws of the
United States.

      (ii) Any amounts received which are included in federal adjusted
gross income but which are specifically exempt from Kansas income tax-
ation under the laws of the state of Kansas.

      (iii) The portion of any gain or loss from the sale or other disposition
of property having a higher adjusted basis for Kansas income tax purposes
than for federal income tax purposes on the date such property was sold
or disposed of in a transaction in which gain or loss was recognized for
purposes of federal income tax that does not exceed such difference in
basis, but if a gain is considered a long-term capital gain for federal in-
come tax purposes, the modification shall be limited to that portion of
such gain which is included in federal adjusted gross income.

      (iv) The amount necessary to prevent the taxation under this act of
any annuity or other amount of income or gain which was properly in-
cluded in income or gain and was taxed under the laws of this state for a
taxable year prior to the effective date of this act, as amended, to the
taxpayer, or to a decedent by reason of whose death the taxpayer acquired
the right to receive the income or gain, or to a trust or estate from which
the taxpayer received the income or gain.

      (v) The amount of any refund or credit for overpayment of taxes on
or measured by income or fees or payments in lieu of income taxes im-
posed by this state, or any taxing jurisdiction, to the extent included in
gross income for federal income tax purposes.

      (vi) Accumulation distributions received by a taxpayer as a beneficiary
of a trust to the extent that the same are included in federal adjusted
gross income.

      (vii) Amounts received as annuities under the federal civil service
retirement system from the civil service retirement and disability fund
and other amounts received as retirement benefits in whatever form
which were earned for being employed by the federal government or for
service in the armed forces of the United States.

      (viii) Amounts received by retired railroad employees as a supple-
mental annuity under the provisions of 45 U.S.C. 228b (a) and 228c (a)(1)
et seq.

      (ix) Amounts received by retired employees of a city and by retired
employees of any board of such city as retirement allowances pursuant to
K.S.A. 13-14,106, and amendments thereto, or pursuant to any charter
ordinance exempting a city from the provisions of K.S.A. 13-14,106, and
amendments thereto.

      (x) For taxable years beginning after December 31, 1976, the amount
of the federal tentative jobs tax credit disallowance under the provisions
of 26 U.S.C. 280 C. For taxable years ending after December 31, 1978,
the amount of the targeted jobs tax credit and work incentive credit dis-
allowances under 26 U.S.C. 280 C.

      (xi) For taxable years beginning after December 31, 1986, dividend
income on stock issued by Kansas Venture Capital, Inc.

      (xii) For taxable years beginning after December 31, 1989, amounts
received by retired employees of a board of public utilities as pension and
retirement benefits pursuant to K.S.A. 13-1246, 13-1246a and 13-1249
and amendments thereto.

      (xiii) For taxable years beginning after December 31, 1993, the
amount of income earned on contributions deposited to an individual
development account under K.S.A. 79-32,117h, and amendments thereto.

      (xiv) For all taxable years commencing after December 31, 1996, that
portion of any income of a bank organized under the laws of this state or
any other state, a national banking association organized under the laws
of the United States, an association organized under the savings and loan
code of this state or any other state, or a federal savings association or-
ganized under the laws of the United States, for which an election as an
S corporation under subchapter S of the federal internal revenue code is
in effect, which accrues to the taxpayer who is a stockholder of such
corporation and which is not distributed to the stockholders as dividends
of the corporation.

      (xv) For all taxable years beginning after December 31, 1999,
amounts not exceeding $2,000, or $4,000 for a married couple filing a
joint return, for each designated beneficiary which are contributed to a
family postsecondary education savings account established under the
Kansas postsecondary education savings program for the purpose of pay-
ing the qualified higher education expenses of a designated beneficiary
at an institution of postsecondary education. The terms and phrases used
in this paragraph shall have the meaning respectively ascribed thereto by
the provisions of K.S.A. 1999 Supp. 75-643, and amendments thereto,
and the provisions of such section are hereby incorporated by reference
for all purposes thereof.

      (d) There shall be added to or subtracted from federal adjusted gross
income the taxpayer's share, as beneficiary of an estate or trust, of the
Kansas fiduciary adjustment determined under K.S.A. 79-32,135, and
amendments thereto.

      (e) The amount of modifications required to be made under this sec-
tion by a partner which relates to items of income, gain, loss, deduction
or credit of a partnership shall be determined under K.S.A. 79-32,131,
and amendments thereto, to the extent that such items affect federal
adjusted gross income of the partner.

      New Sec.  4. The director of accounts and reports shall make payroll
deductions from the salary and wages of state officers and employees for
family postsecondary education savings accounts provided for in K.S.A.
1999 Supp. 75-464, and amendments thereto, when authorized to make
such deductions by the written, voluntary authorization of such officers
and employees. No administrative fees or charges shall be assessed for
costs incurred in making such deductions. Subject to the approval of the
secretary of administration, the director of accounts and reports may pre-
scribe procedures, limitations and conditions for making payroll deduc-
tions pursuant to this section.

      Sec.  5. K.S.A. 1999 Supp. 75-643, 75-646 and 79-32,117 are hereby
repealed.

      Sec.  6. This act shall take effect and be in force from and after its
publication in the Kansas register.

Approved March 21, 2000.
 Published in the Kansas Register March 30, 2000.
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