To amend the Internal Revenue Code of 1986 to permit one-time, tax-free distributions from retirement plans to fund health savings accounts.

Summary: Amends the Internal Revenue Code to exclude from the gross income of an employee covered under a high deductible health care plan a distribution from such employee's qualified retirement plan to fund a health savings account. Exempts such a distribution from the 10 percent penalty on early distributions from qualified retirement plans.

SECTION 1. ONE-TIME DISTRIBUTION FROM RETIREMENT PLANS TO FUND HEALTH 
              SAVINGS ACCOUNTS.

    (a) In General.--Section 402 of the Internal Revenue Code of 1986 
(relating to taxability of beneficiary of employees' trust) is amended 
by adding at the end the following new subsection:
    ``(l) HSA Funding Distribution.--
            ``(1) In general.--In the case of an employee who is an 
        eligible individual and who elects the application of this 
        subsection for a taxable year, gross income of the employee for 
        the taxable year does not include a qualified HSA funding 
        distribution.
            ``(2) Qualified hsa funding distribution.--For purposes of 
        this subsection, the term `qualified HSA funding distribution' 
        means a distribution from an eligible retirement plan of the 
        employee to the extent that such distribution is contributed to 
        the health savings account of the employee not later than the 
        60th day after the day on which the employee receives such 
        distribution or in a direct trustee-to-trustee transfer.
            ``(3) Limitation.--
                    ``(A) Maximum dollar limitations based on coverage 
                in effect at time of contribution.--The amount excluded 
                from gross income by paragraph (1) shall not exceed--
                            ``(i) in the case of an individual who has 
                        self-only coverage under a high deductible 
                        health plan as of the first day of the month in 
                        which the qualified HSA funding distribution is 
                        contributed to the health savings account of 
                        the employee, the lesser of--
                                    ``(I) the amount specified under 
                                clause (i) of section 223(b)(2)(A), or
                                    ``(II) the amount in effect for the 
                                taxable year under clause (ii) of 
                                section 223(b)(2)(A) (determined 
                                without regard to paragraphs (3) and 
                                (4)(C) of section 223(b)), reduced by 
                                any amount contributed to such account 
                                for such taxable year before the date 
                                of the qualified HSA funding 
                                distribution contribution, and
                            ``(ii) in the case of an individual who has 
                        family coverage under a high deductible health 
                        plan as of the first day of the month in which 
                        the qualified HSA funding distribution is 
                        contributed to the health savings account of 
                        the employee, the lesser of--
                                    ``(I) the amount specified under 
                                clause (i) of section 223(b)(2)(B), or
                                    ``(II) the amount in effect for the 
                                taxable year under clause (ii) of 
                                section 223(b)(2)(B) (determined 
                                without regard to paragraphs (3) and 
                                (4)(C) of section 223(b)), reduced by 
                                any amount contributed to such account 
                                for such taxable year before the date 
                                of the qualified HSA funding 
                                distribution contribution.
                    ``(B) One-time transfer.--The election under 
                paragraph (1) shall apply to the taxable year for which 
                made and all subsequent taxable years. Such an 
                election, once made, shall be irrevocable.
            ``(4) Distributions must otherwise be includible.--
                    ``(A) In general.--An amount shall be treated as a 
                distribution for purposes of paragraph (1) only to the 
                extent that such amount would be includible in gross 
                income without regard to paragraph (1).
                    ``(B) Application of section 72.--Notwithstanding 
                section 72, in determining the extent to which an 
                amount is treated as a distribution for purposes of 
                subparagraph (A), the aggregate amounts distributed 
                from an eligible retirement plan in a taxable year 
                shall be treated as includible in gross income (without 
                regard to subparagraph (A)) to the extent that such 
                amount does not exceed the aggregate amount which would 
                have been so includible if all amounts distributed from 
                all eligible retirement plans were treated as 1 
                contract for purposes of determining the inclusion of 
                such distribution under section 72. Proper adjustments 
                shall be made in applying section 72 to other 
                distributions in such taxable year and subsequent 
                taxable years.
            ``(5) Definitions.--For purposes of this subsection--
                    ``(A) Eligible retirement plan.--The term `eligible 
                retirement plan' has the meaning given such term by 
                subsection (c)(8)(B), except that such term shall also 
                include an eligible deferred compensation plan 
                maintained by an eligible employer described in section 
                457(e)(1)(B).
                    ``(B) Eligible individual.--The term `eligible 
                individual' has the meaning given such term by section 
                223(c)(1).
            ``(6) Special rules.--For purposes of this subsection--
                    ``(A) Related plans treated as 1.--All eligible 
                retirement plans of an employer shall be treated as a 
                single plan.
                    ``(B) Surviving spouses, dependents, and alternate 
                payees.--With respect to an eligible retirement plan of 
                an employer, a surviving spouse, a dependent of the 
                surviving spouse, or alternate payee (as defined in 
                section 414(p)(8)) of a former employee shall be 
                treated in the same manner as the former employee.''.
    (b) Coordination With Limitation on Contributions to Health Savings 
Accounts.--Section 223(b)(4) of such Code (relating to coordination 
with other contributions) is amended by striking ``and'' at the end of 
subparagraph (A), by striking the period at the end of subparagraph (B) 
and inserting ``, and'', and by inserting after subparagraph (B) the 
following new subparagraph:
                    ``(C) the aggregate amount contributed to health 
                savings accounts of such individual for such taxable 
                year under section 402(l) (and such amount shall not be 
                allowed as a deduction under subsection (a)).''.
    (c) 10-Percent Penalty on Early Distributions not to Apply.--
Section 72(t)(2)(A) of such Code (relating to subsection not to apply 
to certain distributions) is amended by striking ``or'' at the end of 
clause (vi), by striking the period at the end of clause (vii) and 
inserting ``, or'', and by inserting after clause (vii) the following 
new clause:
                            ``(viii) a qualified HSA funding 
                        distribution (as defined by section 402(l)).''.
    (d) Conforming Amendments.--
            (1) Section 401(k)(2)(B)(i) of such Code (relating to cash 
        or deferred arrangements) is amended by striking ``or'' at the 
        end of subclause (III), by striking ``and'' at the end of 
        subclause (IV) and inserting ``or'', and by inserting after 
        subclause (IV) the following new subclause:
                                    ``(V) the funding of a health 
                                savings account under section 402(l), 
                                and''.
            (2) Section 402(c)(4) of such Code (relating to rules 
        applicable to rollovers from exempt trusts) is amended by 
        striking ``and'' at the end of subparagraph (B), by striking 
        the period at the end of subparagraph (C) and inserting ``, 
        and'', and by inserting after subparagraph (C) the following 
        new subparagraph:
                    ``(D) any qualified HSA funding distribution (as 
                defined by subsection (l)).''.
            (3) Section 403(a) of such Code (relating to taxability of 
        beneficiary under a qualified annuity plan) is amended by 
        inserting after paragraph (1) the following new paragraph:
            ``(2) Special rule for qualified hsa funding 
        distribution.--To the extent provided in section 402(l), 
        paragraph (1) shall not apply to the amount distributed under 
        the contract which is otherwise includible in gross income 
        under this subsection.''.
            (4) Section 403(b) of such Code (relating to taxability of 
        beneficiary under annuity purchased by section 501(c)(3) 
        organization or public school) is amended by inserting after 
        paragraph (1) the following new paragraph:
            ``(2) Special rule for qualified hsa funding 
        distribution.--To the extent provided in section 402(l), 
        paragraph (1) shall not apply to the amount distributed under 
        the contract which is otherwise includible in gross income 
        under this subsection.''.
            (5) Section 457(a) of such Code (relating to year of 
        inclusion in gross income) is amended by adding at the end the 
        following new paragraph:
            ``(3) Special rule for qualified hsa funding 
        distribution.--To the extent provided in section 402(l), 
        paragraph (1) shall not apply to amounts otherwise includible 
        in gross income under this subsection.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to distributions in taxable years beginning after December 31, 
2004.