To amend the Internal Revenue Code of 1986 to provide tax incentives to encourage small business health plans.

Summary: Health Care Relief Act of 2004 - Amends the Internal Revenue Code to allow: (1) taxpayers, including non-itemizing taxpayers, a tax deduction from gross income for the first $2,000 of their out-of-pocket medical expenses; (2) certain small business employers a business tax credit for amounts paid for employee health insurance coverage; and (3) a refundable tax credit up to $500 for the health insurance costs of a taxpayer and the taxpayer's spouse and dependents.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Health Care Relief Act of 2004''.

SEC. 2. FIRST $2,000 OF HEALTH INSURANCE PREMIUMS FULLY DEDUCTIBLE.

    (a) In General.--Subsection (a) of section 213 of the Internal 
Revenue Code of 1986 (relating to medical, dental, etc., expenses) is 
amended to read as follows:
    ``(a) Allowance of Deduction.--There shall be allowed as a 
deduction the following amounts not compensated for by insurance or 
otherwise--
            ``(1) the amount by which the amount of expenses paid 
        during the taxable year (reduced by the amount deductible under 
        paragraph (2)) for medical care of the taxpayer, the taxpayer's 
        spouse, and the taxpayer's dependents (as defined in section 
        152) exceeds 7.5 percent of adjusted gross income, plus
            ``(2) so much of the expenses paid during the taxable year 
        for insurance which constitutes medical care under subsection 
        (d)(1)(D) (other than for a qualified long-term care insurance 
        contract) for such taxpayer, spouse, and dependents as does not 
        exceed $2,000.''.
    (b) Deduction Allowed Whether or not Taxpayer Itemizes Deduction.--
Section 62(a) of the Internal Revenue Code of 1986 (defining adjusted 
gross income) is amended by inserting after paragraph (18) the 
following new paragraph:
            ``(19) Health insurance premiums.--The deduction allowed by 
        section 213(a)(2).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 3. CREDIT FOR HEALTH INSURANCE EXPENSES OF SMALL BUSINESSES.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to business-related 
credits) is amended by adding at the end the following:

``SEC. 45G. SMALL BUSINESS HEALTH INSURANCE EXPENSES.

    ``(a) General Rule.--For purposes of section 38, in the case of a 
small employer, the health insurance credit determined under this 
section for the taxable year is an amount equal to the applicable 
percentage of the expenses paid by the taxpayer during the taxable year 
for health insurance coverage for such year provided under a new health 
plan for employees of such employer.
    ``(b) Applicable Percentage.--For purposes of subsection (a), the 
applicable percentage is--
            ``(1) in the case of insurance purchased as a member of a 
        health benefit purchasing coalition (as defined in regulations 
        prescribed by the Secretary), 40 percent, and
            ``(2) in the case of insurance not described in paragraph 
        (1), 30 percent.
    ``(c) Limitations.--
            ``(1) Per employee dollar limitation.--The amount of 
        expenses taken into account under subsection (a) with respect 
        to any employee for any taxable year shall not exceed--
                    ``(A) in the case of insurance purchased as a 
                member of a coalition referred to in subsection 
                (b)(1)--
                            ``(i) $800 in the case of self-only 
                        coverage, and
                            ``(ii) $2,000 in the case of family 
                        coverage, and
                    ``(B) in any other case--
                            ``(i) $600 in the case of self-only 
                        coverage, and
                            ``(ii) $1,500 in the case of family 
                        coverage.
        In the case of an employee who is covered by a new health plan 
        of the employer for only a portion of such taxable year, the 
        limitation under the preceding sentence shall be an amount 
        which bears the same ratio to such limitation (determined 
        without regard to this sentence) as such portion bears to the 
        entire taxable year.
            ``(2) Period of coverage.--Expenses may be taken into 
        account under subsection (a) only with respect to coverage for 
        the 4-year period beginning on the date the employer 
        establishes a new health plan.
            ``(3) Employer must bear 65 percent of cost.--Expenses may 
        be taken into account under subsection (a) only if at least 65 
        percent of the cost of the coverage (without regard to this 
        section) is borne by the employer.
    ``(d) Definitions.--For purposes of this section--
            ``(1) Health insurance coverage.--The term `health 
        insurance coverage' has the meaning given such term by section 
        9832(b)(1).
            ``(2) New health plan.--
                    ``(A) In general.--The term `new health plan' means 
                any arrangement of the employer which provides health 
                insurance coverage to employees if--
                            ``(i) such employer (and any predecessor 
                        employer) did not establish or maintain such 
                        arrangement (or any similar arrangement) at any 
                        time during the 2 taxable years ending prior to 
                        the taxable year in which the credit under this 
                        section is first allowed, and
                            ``(ii) such arrangement provides health 
                        insurance coverage to at least 70 percent of 
                        the qualified employees of such employer.
                    ``(B) Qualified employee.--
                            ``(i) In general.--The term `qualified 
                        employee' means any employee of an employer and 
                        shall include a leased employee within the 
                        meaning of section 414(n).
            ``(3) Small employer.--The term `small employer' has the 
        meaning given to such term by section 4980D(d)(2); except 
        that--
                    ``(A) only qualified employees shall be taken into 
                account, and
                    ``(B) such section shall be applied by substituting 
                `100 employees' for `50 employees'.
    ``(e) Special Rules.--
            ``(1) Certain rules made applicable.--For purposes of this 
        section, rules similar to the rules of section 52 shall apply.
            ``(2) Amounts paid under salary reduction arrangements.--No 
        amount paid or incurred pursuant to a salary reduction 
        arrangement shall be taken into account under subsection (a).
            ``(3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2004, each dollar 
        amount contained in subsections (c)(1) and (d)(2)(B) shall be 
        increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 2003' for `calendar year 1992' in 
                subparagraph (B) thereof.
        Any increase determined under the preceding sentence shall be 
        rounded to the nearest multiple of $50.
    ``(f) Termination.--This section shall not apply to expenses paid 
or incurred by an employer with respect to any arrangement established 
on or after January 1, 2010.''.
    (b) Credit to Be Part of General Business Credit.--Section 38(b) of 
such Code (relating to current year business credit) is amended by 
striking ``plus'' at the end of paragraph (13), by striking the period 
at the end of paragraph (14) and inserting ``, plus'', and by adding at 
the end the following:
            ``(15) in the case of a small employer (as defined in 
        section 45G(d)(3)), the health insurance credit determined 
        under section 45G(a).''.
    (c) No Carrybacks.--Subsection (d) of section 39 of such Code 
(relating to carryback and carryforward of unused credits) is amended 
by adding at the end the following:
            ``(11) No carryback of section 45g credit before effective 
        date.--No portion of the unused business credit for any taxable 
        year which is attributable to the employee health insurance 
        expenses credit determined under section 45G may be carried 
        back to a taxable year beginning before January 1, 2004.''.
    (d) Denial of Double Benefit.--Section 280C of such Code is amended 
by adding at the end the following new subsection:
    ``(d) Credit for Small Business Health Insurance Expenses.--
            ``(1) In general.--No deduction shall be allowed for that 
        portion of the expenses (otherwise allowable as a deduction) 
        taken into account in determining the credit under section 45G 
        for the taxable year which is equal to the amount of the credit 
        determined for such taxable year under section 45G(a).
            ``(2) Controlled groups.--Persons treated as a single 
        employer under subsection (a) or (b) of section 52 shall be 
        treated as 1 person for purposes of this section.''.
    (e) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 of such Code is amended by adding 
at the end the following:

``Sec. 45G. Small business health insurance expenses.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to amounts paid or incurred in taxable years beginning after 
December 31, 2003, for arrangements established after the date of the 
enactment of this Act.

SEC. 4. REFUNDABLE HEALTH INSURANCE COSTS CREDIT.

    (a) Allowance of Credit.--
            (1) In general.--Subpart C of part IV of subchapter A of 
        chapter 1 of the Internal Revenue Code of 1986 (relating to 
        refundable personal credits) is amended by redesignating 
        section 36 as section 37 and by inserting after section 35 the 
        following new section:

``SEC. 36. HEALTH INSURANCE COSTS FOR UNINSURED INDIVIDUALS.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this subtitle 
for the taxable year an amount equal to the amount paid by the taxpayer 
during such taxable year for qualified health insurance for the 
taxpayer and the taxpayer's spouse and dependents.
    ``(b) Limitation.--The amount allowed as a credit under subsection 
(a) for a taxable year shall not exceed $500.
    ``(c) Qualified Health Insurance.--For purposes of this section, 
the term `qualified health insurance' means health insurance coverage 
(as defined in section 9832(b)(1)).
    ``(d) Special Rules.--
            ``(1) Coordination with medical expense deduction.--The 
        amount which would (but for this paragraph) be taken into 
        account by the taxpayer under section 213 for the taxable year 
        shall be reduced by the credit (if any) allowed by this section 
        to the taxpayer for such year.
            ``(2) Coordination with deduction for health insurance 
        costs of self-employed individuals.--In the case of a taxpayer 
        who is eligible to deduct any amount under section 162(l) for 
        the taxable year, this section shall apply only if the taxpayer 
        elects not to claim any amount as a deduction under such 
        section for such year.
            ``(3) Coordination with deduction for archer msas and 
        hsas.--In the case of a taxpayer who is eligible to deduct any 
        amount under section 220 or 223 for the taxable year, this 
        section shall apply only if the taxpayer elects not to claim 
        any amount as a deduction under such section for such year.
            ``(4) Denial of credit to dependents.--No credit shall be 
        allowed under this section to any individual with respect to 
        whom a deduction under section 151 is allowable to another 
        taxpayer for a taxable year beginning in the calendar year in 
        which such individual's taxable year begins.
            ``(5) Coordination with section 35.--If a taxpayer is 
        eligible for the credit allowed under this section and section 
        35 for any taxable year, the taxpayer shall elect which credit 
        is to be allowed.
    ``(e) Expenses Must Be Substantiated.--A payment for insurance to 
which subsection (a) applies may be taken into account under this 
section only if the taxpayer substantiates such payment in such form as 
the Secretary may prescribe.
    ``(f) Regulations.--The Secretary may prescribe such regulations as 
may be necessary to carry out the purposes of this section.''.
    (b) Conforming Amendments.--
            (1) Section 162(l) of the Internal Revenue Code of 1986 is 
        amended by adding at the end the following:
            ``(6) Election to have subsection apply.--No deduction 
        shall be allowed under paragraph (1) for a taxable year unless 
        the taxpayer elects to have this subsection apply for such 
        year.''.
            (2) Section 220(b) of such Code is amended by adding at the 
        end the following:
            ``(8) Election to have subsection apply.--No deduction 
        shall be allowed under subsection (a) for a taxable year unless 
        the taxpayer elects to have this section apply for such 
        year.''.
            (3) Section 223(b) of such Code is amended by adding at the 
        end the following:
            ``(8) Election to have subsection apply.--No deduction 
        shall be allowed under subsection (a) for a taxable year unless 
        the taxpayer elects to have this section apply for such 
        year.''.
            (4) Paragraph (2) of section 1324(b) of title 31, United 
        States Code, is amended by inserting before the period ``, or 
        from section 36 of such Code''.
            (5) The table of sections for subpart C of part IV of 
        subchapter A of chapter 1 of the Internal Revenue Code of 1986 
        is amended by striking the last item and inserting the 
        following:

``Sec. 36. Health insurance costs for uninsured individuals.
``Sec. 37. Overpayments of tax.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.