SENATE, No. 2186

SECTION 1.  Sections (1) to (15), inclusive shall be known as the Massachusetts Individual Development Account Program Act.

Section 2.  Definitions.

As used in this section, the following words shall have the following meanings:-

“Account” or “Individual Development Account”, an account established under this act.

“Account owner”, an individual of a low and moderate income household who establishes an individual development account by entering into a Massachusetts individual development account program agreement.

“Council”, the investment advisory council established pursuant to section 5B of chapter 10.

“Department”, the department of the state treasurer as defined in section 1 of chapter 10.

“Designated beneficiary”, the individual designated as the individual whose qualified expenses are expected to be paid from the account.

"Low and moderate income household", a household which has income that does not exceed 80 per cent of the median income for the area, with adjustments made for smaller and larger families, as such median shall be determined from time to time by the Secretary of Housing and Urban Development pursuant to 42 USC section 1437(a)(B)(2).

 “Management contract”, the contract executed between the treasurer and the program manager.

“Massachusetts individual development account agreement”, the agreement between the program and an account owner that establishes an individual development account.

“Non-qualified withdrawal”, means a distribution from an individual development account that does not meet the definition of a qualified withdrawal.

 “Program”, the Massachusetts individual development account program established under this act.

“Program manager”, the entity selected by the treasurer to act as the manager of the program.

“Qualified expense”, means an expense related to:

(i)          expenses, including tuition, fees, room and board, books, supplies and equipment, required for the enrollment or attendance at an accredited institution of higher education;

(ii)        expenses related to the purchase of a home, which will serve as the principal place of residence for the account owner;

(iii)       expenses related to major repairs to a new or existing home, which serves as the principal place of residence for the account owner; and,

(iv)      expenses related to starting and operating a new business enterprise.

“Qualified withdrawal”, means a distribution that is not subject to a penalty under this act or taxation under the chapter 62 of the General Laws and that meets one of the following: -

(i)          A withdrawal from an account to pay the qualified expense made by the account owner 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 transfer of funds due to the termination of the management contract as provided in section 5.

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

“Treasurer”, the state treasurer as defined in section 1 of chapter 10 of the General Laws.

Section 3.  Massachusetts individual development account program; establishment; soliciting proposals; duties and powers vested in treasurer; administration of program; funds trustee; personnel and services; selection of program manager; contract.

     (1) The Massachusetts individual development account program is established in the department of the state treasurer.

     (2) The treasurer shall solicit proposals from entities to be the program manager to provide the services described in subsection (5).

     (3) The purposes, powers, and duties of the Massachusetts individual development account program are vested in and shall be exercised by the treasurer or the designee of the treasurer;

     (4) The treasurer shall administer the Massachusetts individual development account program and shall be the trustee for the funds of the Miassachusetts individual development account program;

     (5) The treasurer may employ or contract with personnel and contract for services necessary for the administration of the program and the investment of the assets of 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 the 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.

(c)    The ability of the entity to satisfy the record keeping and reporting requirements of this act.

(d)   The entity’s plan for marketing the program and the investment it is willing to make to promote the program.

(e)    The fees, if any, proposed to be charged to persons opening or maintaining an account.

(f)     The minimum initial deposit and minimum contributions that the entity will require which, for the first year of the program and each year thereafter, shall not be greater than $25.00 for a cash contribution or $15.00 per pay period for payroll deduction plans.

(g)    The ability of the entity to accept electronic withdrawals, including payroll deduction plans.

     (7) The treasurer shall enter into a contract with the 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 program.

(b)   Invest the money received from account owners in one or more investment instruments.

(c)    Engage the services of consultants on a contractual basis 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 which shall not exceed 1.5% of the average daily real assets of the account.

(f)     Develop marketing plans and promotional material(s).

(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 program in compliance with requirements of this act and its management contract.

(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 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 part of 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 program, whether in writing or through the use of any media, is consistent with the marketing developed by the program manager.

(p)   Take any other necessary and proper activities to carry out the purposes of this act.

Section 4.  Management contract; supervision by treasurer.

The treasurer shall be responsible for the ongoing supervision of the management contract in consultation with the council.

Section 5.  Management contract; term; termination.

The treasurer may terminate the management contract based on the criteria specified in the management contract.

Section 6.  Contracts.

The treasurer may into contracts considered necessary and proper for the implementation of the program.

Section 7.  Individual development accounts; establishment; purpose; agreement; form of contribution; withdrawal; distributions; penalty separate accounting for each beneficiary.

     (1) Beginning October 1, 2007, individual savings accounts may be established under this act.

     (2) Any individual of a low and moderate income household may open an individual savings account to save money to pay for qualified expenses, as defined in section 2(b), of one or more beneficiaries.  An account owner shall open only one account for any one designated beneficiary. Each account opened under this act shall have only one designated beneficiary.

     (3) To open an individual savings account, an individual of a low and moderate income household, as defined in section (B), shall enter into a Massachusetts individual development account program agreement with the program.  The Massachusetts individual development account program agreement shall be in the form prescribed by the program manager and approved by the treasurer and shall 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; provided, that nothing herein shall prevent an account owner from naming himself as the designated beneficiary.

  (c) The name, address, and social security number of the designated beneficiary.

  (d) Any other information that the treasurer or program manager considers necessary for the effective administration of the program.

     (4) Any individual of a low and moderate income household 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 but shall not be property.

     (6) An account owner may withdraw all or part of the balance from an account on thirty days notice, or a shorter period as authorized in the Massachusetts individual development account program agreement.

     (7) Distributions from an account shall be used to pay for qualified expenses incurred after the account is established and only in the following circumstances:

(a)    The distribution is made in the form of a check payable to the designated beneficiary and the indicated qualified expense is identified on the check.

(b)    The distribution is made after the designated beneficiary submits documentation to show that the distribution is for a qualified expense and the program has a process for reviewing the validity of the documentation prior to the distribution.

(c)    All of the following apply:

(i)     The designated beneficiary certifies prior to the distribution that the distribution will be expended for his or her qualified expenses within a reasonable time after the distribution is made.

(ii)    The program requires the designated beneficiary to provide documentation of payment of a qualified expense within thirty days after making the distribution and has a process for reviewing the documentation.

(iii)   The program retains an account balance that is large enough to collect any penalty owed under subsection (8) on the distribution if valid documentation is not provided.

     (8) Except as otherwise provided in this subsection for tax years that begin January 1, 2007, if the distribution is not a qualified withdrawal, the program manager shall withhold an amount equal to ten per cent of the distribution amount as a penalty and pay that amount to the department for deposit into the general fund.

     (9) The program shall provide separate accounting for each designated beneficiary.

Section 8.  Account owner or designated beneficiary; changes; transfer.

     (1) An account owner may designate another individual as a successor owner of the account in the event of the death of an account owner.

     (2) An account owner may change the designated beneficiary of an account to another designated beneficiary of the same account as provided in the management contract or as otherwise provided in this act.

     (3) An account owner may transfer all or a portion of an account to another individual development account.

Section 9.  Maximum account balance limit; limitation; rejection of contribution to designated beneficiary account.

     (1) The maximum account balance limit for any and all accounts that name the same individual as the designated beneficiary shall not exceed a maximum of two hundred and fifty thousand dollars.

     (2) The program shall reject a contribution to any account for a designated beneficiary, if at the time of the contribution, the total balance of all accounts for said designated beneficiary has reached the maximum account balance limit under subsection (1); provided, that said accounts may continue to accrue earnings if the total balance of all accounts for that designated beneficiary has reached the maximum account balance limit and shall not be considered to have exceeded the maximum account balance limit under subsection (1).

Section 10.  Account distributions; report to department of revenue and account owner; statements.

     (1) The program manager shall report distributions from an account to any individual or for the benefit of any individual during a tax year to the department of revenue and the account owner or, to the extent required by state law or regulation, to the distributee.

     (2) The 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 February 1 following the end of each calendar year.

Section 11.  Disclosure of information.

The program manager shall disclose the following information in writing to each account owner of an individual development account and any other person who requests information about an individual development account:

(a)      The terms and conditions for establishing an individual development account.

(b)      Restrictions on the substitutions of designated beneficiaries and transfer of account funds.

(c)      The person entitled to terminate a Massachusetts individual development account program agreement.

(d)      The period of time during which a designated beneficiary may receive benefits under the Massachusetts individual development 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 Massachusetts individual development account program agreements and any other terms, conditions, and provisions of a contract or an agreement entered into under this act.

Section 12.  Construction or interpretation of act and agreement.

This act and any agreement under this act shall not be construed or interpreted to do any of the following:

(a) Give any designated beneficiary any rights or legal interest with respect to an account unless the designated beneficiary is the account owner.

(b) Give residency status to an individual merely because the individual is a designated beneficiary.

(d) Guarantee that amounts contributed to an account will be sufficient to cover the qualified expenses of a designated beneficiary.

Section 13.  Obligation upon state, agency, or instrumentality of state.

     (1) This act does not create and shall not be construed to create any obligation upon this state or any agency or instrumentality of this state to guarantee for the benefit of an account owner or designated beneficiary any of the following:

     (a) The rate of interest or other return on an account.

     (b) The payment of interest or other return on an account.

     (2) The contracts, applications, deposit slips, and other similar documents used in connection with a contribution to an account shall clearly indicate that the account is not insured by this state and that the money deposited into and investment return earned on an account are not guaranteed by this state.

Section 14.  Annual report.

The program manager shall file an annual report with the treasurer and the council that includes all of the following:

(a) The names and identification numbers of account owners and designated beneficiaries. The information reported pursuant to this subdivision shall not be subject to the freedom of information act.

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

(c) All distributions from all accounts and whether or not 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.

Section 15.  Contributions and interest earned as tax exempt; withdrawals as taxable.

     (1) Contributions to and interest earned on an individual development account are exempt from taxation as provided in section 2 of chapter 62 of the General Laws.

     (2) Non-qualified withdrawals made from individual development accounts are taxable as provided in section 2 of chapter 62 of the General Laws.

SECTION 2.  Section 2(a)(2) of chapter 62 of the General Laws, as appearing in the Official Edition, is hereby amended by inserting after paragraph (K) the following new paragraph:-

“(L) Contributions made to and interest earned on an individual development account established pursuant to the Massachusetts individual development account program act.”

SECTION 3.  Section 2(a)(1) of chapter 62 of the General Laws, as appearing in the Official Edition, is hereby amended by inserting after paragraph (I) the following new paragraph:-

“(J) Income earned from non-qualified withdrawals from an individual development account established pursuant to the Massachusetts individual development account program act.”