STAR Act of 2020

I 116TH CONGRESS 2D SESSION H. R. 8787 To amend the Internal Revenue Code of 1986 to permit withdrawals from certain retirement plans for repayment of student loan debt, and for other purposes. IN THE HOUSE OF REPRESENTATIVES NOVEMBER 19, 2020 Mrs. LESKO introduced the following bill; which was referred to the Com- mittee on Ways and Means, and in addition to the Committee on Edu- cation and Labor, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned A BILL To amend the Internal Revenue Code of 1986 to permit withdrawals from certain retirement plans for repayment of student loan debt, and for other purposes. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Student Aid and Tax 4 Advantaged Accounts Reform Act of 2020’’ or the ‘‘STAR 5 Act of 2020’’. 6 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 2 •HR 8787 IH SEC. 2. TREATMENT OF CERTAIN QUALIFIED EDUCATION 1 BENEFITS FOR FINANCIAL AID PURPOSES. 2 Section 480(f) of the Higher Education Act of 1965 3 (20 U.S.C. 1087vv(f)) is amended— 4 (1) by amending subparagraph (B) of para- 5 graph (3) to read as follows: 6 ‘‘(B) the parent if the student is a depend- 7 ent student, regardless of whether the owner of 8 the account is the student or the parent, except 9 that the value of a qualified education benefit 10 with a designated beneficiary other than the de- 11 pendent student applying for aid under this 12 title shall not be considered an asset of the par- 13 ent.’’; and 14 (2) in paragraph (4)— 15 (A) in subparagraph (A), by striking 16 ‘‘and’’ at the end; and 17 (B) by striking subparagraph (B) inserting 18 the following: 19 ‘‘(B) in the case of a program in which 20 contributions are made to an account that is es- 21 tablished for the purpose of meeting the quali- 22 fied higher education expenses of an inde- 23 pendent student who is the designated bene- 24 ficiary of the account, the current balance of 25 such account; and 26 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 3 •HR 8787 IH ‘‘(C) in the case of a program in which 1 contributions are made to an account that is es- 2 tablished for the purpose of meeting the quali- 3 fied higher education expenses of a dependent 4 student who is the designated beneficiary of the 5 account, the highest monthly balance of such 6 account in the period of four years preceding 7 the date of application for aid under this title.’’. 8 SEC. 3. WITHDRAWALS FOR HIGHER EDUCATION EX- 9 PENSES. 10 (a) 401(k) PLANS.—Paragraph (14) of section 11 401(k) of the Internal Revenue Code of 1986 is amended 12 by adding at the end the following new subparagraph: 13 ‘‘(C) DISTRIBUTIONS FOR QUALIFIED 14 HIGHER EDUCATION EXPENSES.— 15 ‘‘(i) IN GENERAL.—A distribution 16 shall be treated as made upon hardship of 17 the employee to the extent that the aggre- 18 gate amount of such distributions during 19 the taxable year does not exceed the lesser 20 of— 21 ‘‘(I) the amount paid by the tax- 22 payer for qualified higher education 23 expenses during such taxable year, or 24 ‘‘(II) $5,250. 25 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 4 •HR 8787 IH ‘‘(ii) DISTRIBUTION MUST BE OTHER- 1 WISE DISALLOWED.—Clause (i) shall not 2 apply to any distribution which is permis- 3 sible under paragraph (2)(B)(i) (including 4 distributions which would be treated as 5 made upon hardship of the employee with- 6 out regard to this subparagraph). 7 ‘‘(iii) NO REQUIREMENT TO DEM- 8 ONSTRATE HARDSHIP.—Clause (i) shall 9 apply without regard to any requirement to 10 demonstrate financial need or hardship, or 11 to demonstrate that other assets are not 12 available to pay the qualified higher edu- 13 cation expenses. 14 ‘‘(iv) ADDITIONAL TAX UNDER SEC- 15 TION 72(t) NOT TO APPLY.—No tax shall 16 be imposed under section 72(t) on any 17 amount treated as a hardship distribution 18 by reason of clause (i). 19 ‘‘(v) QUALIFIED HIGHER EDUCATION 20 EXPENSES.—For purposes of this subpara- 21 graph, the term ‘qualified higher education 22 expenses’ has the meaning given such term 23 by section 72(t)(7).’’. 24 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 5 •HR 8787 IH (b) 403(b) PLANS.—Paragraph (11) of section 1 403(b) of the Internal Revenue Code of 1986 is amended 2 by adding at the end the following: ‘‘Under rules similar 3 to the rules of section 401(k)(14)(C), a distribution shall 4 be treated as made upon hardship of the employee to the 5 extent that the aggregate amount of such distributions 6 during the taxable year does not exceed the lesser of the 7 amount paid by the taxpayer for qualified higher edu- 8 cation expenses during such taxable year, or $5,250.’’. 9 (c) 457 PLANS.—Paragraph (1) of section 457(d) of 10 the Internal Revenue Code of 1986 is amended by adding 11 at the end the following: ‘‘Under rules similar to the rules 12 of section 401(k)(14)(C) (and without regard to whether 13 the expenses are unforeseen), a distribution shall be treat- 14 ed as made by reason of unforeseen emergency to the ex- 15 tent that the aggregate amount of such distributions dur- 16 ing the taxable year does not exceed the lesser of the 17 amount paid by the taxpayer for qualified higher edu- 18 cation expenses during such taxable year, or $5,250.’’. 19 (d) EFFECTIVE DATE.—The amendment made by 20 this section shall apply to distributions made after the 21 date of the enactment of this Act. 22 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 6 •HR 8787 IH SEC. 4. PENALTY-FREE WITHDRAWALS FROM IRAS FOR 1 STUDENT LOAN EXPENSES OF TAXPAYERS, 2 SPOUSES, CHILDREN, AND GRANDCHILDREN. 3 (a) IN GENERAL.—Paragraph (7) of section 72(t) of 4 the Internal Revenue Code of 1986 is amended by adding 5 at the end the following new subparagraph: 6 ‘‘(C) STUDENT LOANS.—Such term shall 7 include amounts paid in repayment of any loan 8 made to an individual described in subpara- 9 graph (A) to assist the individual in attending 10 an educational organization described in section 11 170(b)(1)(A)(ii).’’. 12 (b) EFFECTIVE DATE.—The amendment made by 13 this section shall apply to distributions made after the 14 date of the enactment of this Act. 15 SEC. 5. EXCLUSION OF DISTRIBUTIONS FOR EDUCATIONAL 16 EXPENSES. 17 (a) IN GENERAL.—Section 402 of the Internal Rev- 18 enue Code of 1986 is amended by adding at the end the 19 following new subsection: 20 ‘‘(m) DISTRIBUTIONS FOR QUALIFIED HIGHER EDU- 21 CATION EXPENSES.— 22 ‘‘(1) IN GENERAL.—Gross income for the tax- 23 able year does not include— 24 ‘‘(A) any distribution from a qualified cash 25 or deferred arrangement (as defined in section 26 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 7 •HR 8787 IH 401(k)(2)), an annuity contract described in 1 section 403(b), or an eligible deferred com- 2 pensation plan described in section 457(b) 3 which is maintained by an eligible employer de- 4 scribed in section 457(e)(1)(A), which is treated 5 as made upon hardship of the employee by rea- 6 son of section 401(k)(14)(C), the last sentence 7 of section 403(b)(11), or the last sentence of 8 section 457(d)(1), or 9 ‘‘(B) any distribution from an individual 10 retirement account (as defined in section 11 408(a)) to which section 72(t)(2)(E) applies. 12 ‘‘(2) DISTRIBUTIONS MUST OTHERWISE BE IN- 13 CLUDIBLE.— 14 ‘‘(A) IN GENERAL.—An amount shall be 15 treated as described in paragraph (1) only to 16 the extent that such amount would be includible 17 in gross income without regard to such para- 18 graph. 19 ‘‘(B) APPLICATION OF SECTION 72.—In de- 20 termining whether a distribution would be in- 21 cludible in gross income but for this subsection, 22 rules similar to the rules of subsection (l)(3)(B) 23 shall apply (by taking into account all retire- 24 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 8 •HR 8787 IH ment plans in which the taxpayer is a partici- 1 pant).’’. 2 (b) COORDINATION WITH DEDUCTIONS AND CRED- 3 ITS.— 4 (1) COORDINATION WITH AMERICAN OPPOR- 5 TUNITY AND LIFETIME LEARNING CREDITS.— 6 (A) IN GENERAL.—Paragraph (2) of sec- 7 tion 25A(g) of the Internal Revenue Code of 8 1986 is amended by redesignating subpara- 9 graph (C) as subparagraph (D), by striking 10 ‘‘and’’ at the end of subparagraph (B), and by 11 inserting after subparagraph (B) the following 12 new subparagraph: 13 ‘‘(C) a distribution from a qualified cash 14 or deferred arrangement (as defined in section 15 401(k)(2)), an annuity contract described in 16 section 403(b), an eligible deferred compensa- 17 tion plan described in section 457(b) which is 18 maintained by an eligible employer described in 19 section 457(e)(1)(A), or an individual retire- 20 ment account (as defined in section 408(a)) 21 which is excluded from gross income of the dis- 22 tributee under section 402(m) (other than any 23 portion of such a distribution which is attrib- 24 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 9 •HR 8787 IH utable to the repayment of a loan described in 1 section 72(t)(7)(C)), and’’. 2 (B) COORDINATION WITH WAIVER OF PEN- 3 ALTY.—Subparagraph (B) of section 72(t)(7) is 4 amended by inserting ‘‘(without regard to sub- 5 paragraph (C) thereof)’’ before the period. 6 (2) DEDUCTION FOR INTEREST ON EDUCATION 7 LOANS.—Paragraph (1) of section 221(e) of such 8 Code is amended by inserting before the period at 9 the end the following: ‘‘, or for any amount paid 10 with a distribution which is excluded from gross in- 11 come under section 402(m)’’. 12 (c) EFFECTIVE DATE.—The amendment made by 13 this section shall apply to distributions made after the 14 date of the enactment of this Act. 15 SEC. 6. INCLUSION OF EMPLOYER STUDENT LOAN PAY- 16 MENTS IN EDUCATIONAL ASSISTANCE PRO- 17 GRAMS. 18 (a) IN GENERAL.—Paragraph (1) of section 127(c) 19 of the Internal Revenue Code of 1986 is amended— 20 (1) by striking ‘‘and’’ at the end of subpara- 21 graph (A), 22 (2) by adding ‘‘and’’ at the end of subpara- 23 graph (B), and 24 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 10 •HR 8787 IH (3) by inserting after subparagraph (B) the fol- 1 lowing new subparagraph: 2 ‘‘(C) the payment, by an employer, of 3 amounts in repayment of any loan made to the 4 employee to assist the employee in attending an 5 educational organization described in section 6 170(b)(1)(A)(ii),’’. 7 (b) DENIAL OF DOUBLE BENEFIT.—Paragraph (1) 8 of section 221(e) of the Internal Revenue Code of 1986, 9 as amended by section 4, is further amended by inserting 10 ‘‘which is excluded from gross income under section 127 11 or is’’ after ‘‘or for any amount’’. 12 (c) EFFECTIVE DATE.—The amendments made by 13 this section shall apply to taxable years beginning after 14 the date of the enactment of this Act. 15 SEC. 7. REPEAL OF CAP ON DEDUCTION FOR INTEREST ON 16 EDUCATION LOANS. 17 (a) IN GENERAL.—Section 221 of the Internal Rev- 18 enue Code of 1986 is amended by striking subsections (b) 19 and (f). 20 (b) CARRYOVER OF EXCESS INTEREST.—Section 221 21 of the Internal Revenue Code of 1986, as so amended, 22 is amended by inserting after subsection (a) the following 23 new subsection: 24 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 11 •HR 8787 IH ‘‘(b) CARRYOVER.—If the amount of the deduction 1 allowable under subsection (a) exceeds the taxable income 2 of the taxpayer for the taxable year (determined without 3 regard to this section), then an amount equal to such ex- 4 cess shall be treated as interest paid by the taxpayer in 5 the succeeding taxable year on a qualified education 6 loan.’’. 7 (c) EFFECTIVE DATE.—The amendments made by 8 this section shall apply to taxable years beginning after 9 the date of the enactment of this Act. 10 SEC. 8. EMPLOYER ROTH CONTRIBUTIONS. 11 (a) IN GENERAL.—Subsection (a) of section 402A of 12 the Internal Revenue Code of 1986 is amended— 13 (1) by striking ‘‘and’’ at the end of paragraph 14 (1), 15 (2) by redesignating paragraph (2) as para- 16 graph (3), and 17 (3) by inserting after paragraph (1) the fol- 18 lowing new paragraph: 19 ‘‘(2) in the case of a qualified cash or deferred 20 arrangement (as defined in section 401(k)(2)), any 21 designated Roth employer contribution made pursu- 22 ant to the arrangement shall be treated for purposes 23 of this chapter in the same manner as contributions 24 described in section 401(k)(3)(D)(ii), except that 25 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 12 •HR 8787 IH such contribution shall not be excludable from gross 1 income, and’’. 2 (b) CONFORMING AMENDMENTS.— 3 (1) Paragraph (1) of section 402A(b) of the In- 4 ternal Revenue Code of 1986 is amended— 5 (A) by striking ‘‘may elect to make’’ and 6 inserting ‘‘may elect— 7 ‘‘(A) to make’’, 8 (B) by striking the period at the end and 9 inserting ‘‘, and’’, and 10 (C) by adding at the end the following new 11 subparagraph: 12 ‘‘(B) in the case of a qualified cash or de- 13 ferred arrangement (as defined in section 14 401(k)(2)), to have the employee’s employer 15 make designated Roth employer contributions 16 in lieu of all or a portion of the matching or 17 nonelective contributions the employee is other- 18 wise eligible to receive under the arrange- 19 ment.’’. 20 (2) Paragraph (2)(A) of section 402A(b) of 21 such Code is amended by striking ‘‘of each em- 22 ployee’’ and inserting ‘‘and designated Roth em- 23 ployer contributions with respect to each employee’’. 24 VerDate Sep 11 2014 21:55 Nov 29, 2020 Jkt 019200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\H8787.IH H8787 pbinns on DSKJLVW7X2PROD with BILLS 13 •HR 8787 IH (3) [Text truncated for display. 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