To amend the Internal Revenue Code of 1986 to improve access to health care through expanded health savings accounts.

Summary: HSA Improvement and Expansion Act of 2007 - Amends Internal Revenue Code provisions relating to health savings accounts (HSAs) to: (1) allow HSAs to incorporate flexible spending and health reimbursement arrangements; (2) increase the annual HSA contribution limitation; (3) permit the use of HSAs to purchase health insurance; (4) allow the payment of certain medical expenses incurred before the establishment of an HSA; (5) allow veterans eligible for service-connected disability benefits to establish an HSA; and (6) allow spouses to make increased catch-up contributions to a single HSA.

SECTION 1. SHORT TITLE, ETC.

    (a) Short Title.--This Act may be cited as the ``HSA Improvement 
and Expansion Act of 2007''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents is as follows:

Sec. 1. Short title, etc.
Sec. 2. Health reimbursement arrangements and spending arrangements in 
                            combination with health savings accounts.
Sec. 3. Increase in annual HSA contribution limitation.
Sec. 4. Purchase of health insurance from HSA account.
Sec. 5. Special rule for certain medical expenses incurred before 
                            establishment of account.
Sec. 6. Provisions relating to Medicare.
Sec. 7. Individuals eligible for veterans benefits for a service-
                            connected disability.
Sec. 8. Allow both spouses to make catch-up contributions to the same 
                            HSA account.
Sec. 9. FSA and HRA Termination to fund HSAs.

SEC. 2. HEALTH REIMBURSEMENT ARRANGEMENTS AND SPENDING ARRANGEMENTS IN 
              COMBINATION WITH HEALTH SAVINGS ACCOUNTS.

    (a) In General.--Subparagraph (B) of section 223(c)(1) (relating to 
certain coverage disregarded) is amended by striking ``and'' at the end 
of clause (ii), by striking the period at the end of clause (iii) and 
inserting ``, and'', and by inserting after clause (iii) the following 
new clause:
                            ``(iv) coverage under a flexible spending 
                        arrangement or a health reimbursement 
                        arrangement, or both, which meets the 
                        requirements of paragraph (6).''.
    (b) Combination Health Reimbursement, Savings, and Spending 
Arrangements.--Subsection (c) of section 223 (relating to definitions 
and special rules) is amended by adding at the end the following new 
paragraph:
            ``(6) Combined limit for contributions or credits to health 
        reimbursement, arrangements and spending arrangements.--
                    ``(A) In general.--In the case of coverage under a 
                flexible spending arrangement or a health reimbursement 
                arrangement, or both, such coverage meets the 
                requirements of this paragraph if, with respect to an 
                individual--
                            ``(i) the sum of--
                                    ``(I) the amount allowable as a 
                                deduction under subsection (a),
                                    ``(II) the salary reduction amount 
                                elected by the individual and, if 
                                applicable, the employer contribution 
                                or credit allocated to the individual 
                                for the taxable year under the flexible 
                                spending arrangement (as defined in 
                                section 106(c)(2)), plus
                                    ``(III) the amounts that the 
                                individual is permitted, under the 
                                terms of the plan, to receive in 
                                reimbursements for the taxable year 
                                under the health reimbursement 
                                arrangement, does not exceed
                            ``(ii) the sum of the annual deductible and 
                        the other annual out-of-pocket expenses (other 
                        than for premiums) required to be paid under 
                        the plan by the eligible individual for covered 
                        benefits.
                    ``(B) Exceptions for disregarded coverage.--For 
                purposes of subparagraph (A)--
                            ``(i) Certain flexible spending 
                        arrangements.--Any flexible spending 
                        arrangement salary reduction amounts or 
                        employer contributions or credits that are 
                        restricted by the employer to use for coverage 
                        described in paragraph (1)(B) shall not be 
                        taken into account under subparagraph 
                        (A)(i)(II).
                            ``(ii) Certain health reimbursement 
                        arrangements.--Any reimbursements from a health 
                        reimbursement arrangement for coverage 
                        described in paragraph (1)(B) shall not be 
                        taken into account under subparagraph 
                        (A)(i)(III).
                            ``(iii) Qualified hsa distributions from 
                        fsa and hra terminations.--Any qualified HSA 
                        distribution (as defined in section 106(e)) 
                        shall not be taken into account under 
                        subparagraph (A)(i).
                    ``(C) Termination.--Coverage shall not be treated 
                as meeting the requirements of this paragraph for any 
                taxable year beginning after December 31, 2012.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 3. INCREASE IN ANNUAL HSA CONTRIBUTION LIMITATION.

    (a) In General.--Paragraph (2) of section 223(b) (relating to 
monthly limitation) is amended--
            (1) in subparagraph (A) by striking ``$2,250'' and 
        inserting ``$4,500'', and
            (2) in subparagraph (B) by striking ``$4,500'' and 
        inserting ``$9,000''.
    (b) Cost-of-Living Adjustment.--Section 223(g)(1)(B)(i) is amended 
by striking ``calendar year 1997'' and inserting ``calendar year 
2007''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 4. PURCHASE OF HEALTH INSURANCE FROM HSA ACCOUNT.

    (a) In General.--Paragraph (2) of section 223(d) (defining 
qualified medical expenses) is amended--
            (1) by striking subparagraphs (B) and (C),
            (2) in subparagraph (A) by striking ``(a) in general.--'' 
        and moving the text 2 ems to the left, and
            (3) by inserting `` and including payment for insurance)'' 
        after ``section 213(d)''.
    (b) Effective Date.--The amendments made by this section shall 
apply with respect to insurance purchased after the date of the 
enactment of this Act in taxable years beginning after such date.

SEC. 5. SPECIAL RULE FOR CERTAIN MEDICAL EXPENSES INCURRED BEFORE 
              ESTABLISHMENT OF ACCOUNT.

    (a) In General.--Subsection (d) of section 223, as amended by 
section 4, is amended by redesignating paragraph (4) as paragraph (5) 
and by inserting after paragraph (3) the following new paragraph:
            ``(4) Certain medical expenses incurred before 
        establishment of account treated as qualified.--
                    ``(A) In general.--For purposes of paragraph (2), 
                an expense shall not fail to be treated as a qualified 
                medical expense solely because such expense was 
                incurred before the establishment of the health savings 
                account if such expense was incurred during the 60-day 
                period beginning on the date on which the high 
                deductible health plan is first effective.
                    ``(B) Special rules.--For purposes of subparagraph 
                (A)--
                            ``(i) an individual shall be treated as an 
                        eligible individual for any portion of a month 
                        for which the individual is described in 
                        subsection (c)(1), determined without regard to 
                        whether the individual is covered under a high 
                        deductible health plan on the 1st day of such 
                        month, and
                            ``(ii) the effective date of the health 
                        savings account is deemed to be the date on 
                        which the high deductible health plan is first 
                        effective after the date of the enactment of 
                        this paragraph.''.
    (b) Effective Date.--The amendment made by this section shall apply 
with respect to insurance purchased after the date of the enactment of 
this Act in taxable years beginning after such date.

SEC. 6. PROVISIONS RELATING TO MEDICARE.

    (a) Individuals Over Age 65 Only Enrolled in Medicare Part A.--
Section 223(b)(7) (relating to contribution limitation on Medicare 
eligible individuals) is amended by adding at the end the following new 
sentence: ``This paragraph shall not apply to any individual during any 
period the individual's only entitlement to such benefits is an 
entitlement to hospital insurance benefits under part A of title XVIII 
of such Act pursuant to an enrollment for such hospital insurance 
benefits under section 226(a)(1) of such Act.''.
    (b) Medicare Beneficiaries Participating in Medicare Advantage MSA 
May Contribute Their Own Money to Their MSA.--Subsection (b) of section 
138 is amended by striking paragraph (2) and redesignating paragraphs 
(3) and (4) as paragraphs (2) and (3), respectively.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 7. INDIVIDUALS ELIGIBLE FOR VETERANS BENEFITS FOR A SERVICE-
              CONNECTED DISABILITY.

    (a) In General.--Section 223(c)(1) (defining eligible individual) 
is amended by adding at the end the following new subparagraph:
                    ``(D) Special rule for individuals eligible for 
                certain veterans benefits.--For purposes of 
                subparagraph (A)(ii), an individual shall not be 
                treated as covered under a health plan described in 
                such subparagraph merely because the individual 
                receives periodic hospital care or medical services for 
                a service-connected disability under any law 
                administered by the Secretary of Veterans Affairs but 
                only if the individual is not eligible to receive such 
                care or services for any condition other than a 
                service-connected disability.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 8. ALLOW BOTH SPOUSES TO MAKE CATCH-UP CONTRIBUTIONS TO THE SAME 
              HSA ACCOUNT.

    (a) In General.--Paragraph (3) of section 223(b) is amended by 
adding at the end the following new subparagraph:
                    ``(C) Special rule where both spouses are eligible 
                individuals with 1 account.--If--
                            ``(i) an individual and the individual's 
                        spouse have both attained age 55 before the 
                        close of the taxable year, and
                            ``(ii) the spouse is not an account 
                        beneficiary of a health savings account as of 
                        the close of such year,
                the additional contribution amount shall be 200 percent 
                of the amount otherwise determined under subparagraph 
                (B).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 9. FSA AND HRA TERMINATION TO FUND HSAS.

    (a) Grace Period Not Required.--Section 106(e)(2) of the Internal 
Revenue Code of 1986 is amended by adding at the end the following new 
sentence: ``A distribution shall not fail to be treated as a qualified 
HSA distribution merely because the balance in such arrangement is 
determined without regard to the requirement that unused amounts 
remaining at the end of a plan year must be forfeited in the absence of 
a grace period.''.
    (b) Deposit in Limited FSA or HRA of Funds in Excess FSA or HRA 
Termination Distribution.--Paragraph (1) of section 106(e) of such Code 
is amended by inserting before the period at the end thereof the 
following: ``and the deposit of funds in excess of a qualified HSA 
distribution amount into a health flexible spending account or health 
reimbursement arrangement which is compatible with a health savings 
account and which, on the date of such distribution, is a part of the 
employer's plan''.
    (c) Disclaimer of Disqualifying Coverage.--Subparagraph (B) of 
section 223(c)(1) of such Code is amended by striking ``and'' at the 
end of clause (ii), by striking the period at the end of clause (iii) 
and inserting ``, and'', and by inserting after clause (iii) the 
following new clause:
                            ``(iv) any coverage (whether actual or 
                        prospective) otherwise described in 
                        subparagraph (A)(ii) which is disclaimed at the 
                        time of the creation or organization of the 
                        health savings account.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.