IB 

Union Calendar No. 89

108TH CONGRESS 

1ST SESSION H. R. 2351

[Report No. 108–177] 

To amend the Internal Revenue Code of 1986 to allow a deduction to 

individuals for amounts contributed to health savings accounts and to 

provide for the disposition of unused health benefits in cafeteria plans 

and flexible spending arrangements. 

IN THE HOUSE OF REPRESENTATIVES 

JUNE 5, 2003

Mr. THOMAS (for himself, Mr. LIPINSKI, Mrs. JOHNSON of Connecticut, Mr. 

SAM JOHNSON of Texas, Mr. HAYWORTH, Mr. LEWIS of Kentucky, Mr. 

BRADY of Texas, Mr. ENGLISH, Mr. SESSIONS, Mr. OSE, Mr. FOSSELLA, 

Mr. PAUL, Mr. SMITH of New Jersey, Mr. WELDON of Florida, Mr. 

RYUN of Kansas, Mr. DELAY, Mr. TOOMEY, Mr. BARTON of Texas, Mr. 

WALSH, Mr. BALLENGER, Mr. CAMP, Mr. COLLINS, Mr. RYAN of Wisconsin, Mr. KELLER, Mr. HERGER, Mr. DOOLITTLE, Mr. DEMINT, and 

Mr. NORWOOD) introduced the following bill; which was referred to the 

Committee on Ways and Means 

JUNE 25, 2003

Additional sponsors: Mr. BURTON of Indiana, Ms. HART, Mr. GREENWOOD, 

Mr. KOLBE, Mr. SENSENBRENNER, Mr. GUTKNECHT, Mr. SHAYS, Mr. 

LATOURETTE, Mr. AKIN, Mr. LINDER, Mr. UPTON, Mr. PORTMAN, Mr. 

KENNEDY of Minnesota, Mr. LUCAS of Kentucky, Mr. RAMSTAD, Mr. 

HALL, Mr. KING of Iowa, Mr. JONES of North Carolina, Mr. PETERSON

of Minnesota, Mr. DEUTSCH, Mr. NETHERCUTT, Mr. CANNON, Mrs. 

KELLY, Mr. ROYCE, and Mr. BARRETT of South Carolina 

JUNE 25, 2003 

Reported with an amendment, committed to the Committee of the Whole 

House on the State of the Union, and ordered to be printed 
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[Strike out all after the enacting clause and insert the part printed in italic] 

[For text of introduced bill, see copy of bill as introduced on June 5, 2003] 

A BILL

To amend the Internal Revenue Code of 1986 to allow a 

deduction to individuals for amounts contributed to 

health savings accounts and to provide for the disposition 

of unused health benefits in cafeteria plans and flexible 

spending arrangements.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Health Savings Account 

5 Availability Act’’. 

6 SEC. 2. HEALTH SAVINGS ACCOUNTS. 

7 (a) IN GENERAL.—Part VII of subchapter B of chapter 

8 1 of the Internal Revenue Code of 1986 (relating to addi9 tional itemized deductions for individuals) is amended by 

10 redesignating section 223 as section 224 and by inserting 

11 after section 222 the following new section: 

12 ‘‘SEC. 223. HEALTH SAVINGS ACCOUNTS. 

13 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi14 vidual who is an eligible individual for any month during 

15 the taxable year, there shall be allowed as a deduction for 

16 the taxable year an amount equal to the aggregate amount 
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1 paid in cash during such taxable year by such individual 

2 to a health savings account of such individual. 

3 ‘‘(b) LIMITATIONS.—

4 ‘‘(1) IN GENERAL.—The amount allowable as a 

5 deduction under subsection (a) to an individual for 

6 the taxable year shall not exceed the sum of the 

7 monthly limitations for months during such taxable 

8 year that the individual is an eligible individual. 

9 ‘‘(2) MONTHLY LIMITATION.—The monthly limitation for any month is 1 10 ⁄12 of—

11 ‘‘(A) $2,000, in the case of an eligible indi12 vidual who—

13 ‘‘(i) has self-only coverage under a 

14 minimum deductible plan as of the first 

15 day of such month, or 

16 ‘‘(ii) is uninsured as of the first day of 

17 such month and is not described in sub18 paragraph (B)(ii) with respect to the tax19 able year which includes such month, 

20 ‘‘(B) $4,000, in the case of an eligible indi21 vidual who—

22 ‘‘(i) has family coverage under a min23 imum deductible plan as of the first day of 

24 such month, or 
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1 ‘‘(ii) is uninsured as of the first day of 

2 such month and, with respect to the taxable 

3 year which includes such month— 

4 ‘‘(I) is entitled to a deduction for 

5 a dependent under section 151(c) (or 

6 would be so entitled but for paragraph 

7 (2) or (4) of section 152(e)), or 

8 ‘‘(II) files a joint return, and 

9 ‘‘(C) zero in any other case. 

10 ‘‘(3) ADDITIONAL CONTRIBUTIONS FOR INDIVID11 UALS 55 OR OLDER.—

12 ‘‘(A) IN GENERAL.—In the case of an indi13 vidual who has attained the age of 55 before the 

14 close of the taxable year, paragraph (2) shall be 

15 applied by increasing the $2,000 amount in 

16 paragraph (2)(A) and the $4,000 amount in 

17 paragraph (2)(B) by the additional contribution 

18 amount. 

19 ‘‘(B) ADDITIONAL CONTRIBUTION

20 AMOUNT.—For purposes of this section, the addi21 tional contribution amount is the amount deter22 mined in accordance with the following table:

‘‘For taxable years The additional 

beginning in: contribution amount is: 

2004 ................................................................................................ $500

2005 ................................................................................................ $600

2006 ................................................................................................ $700

2007 ................................................................................................ $800
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‘‘For taxable years The additional 

beginning in: contribution amount is: 

2008 ................................................................................................ $900

2009 and thereafter ........................................................................ $1,000.

1 ‘‘(4) LIMITATION BASED ON ADJUSTED GROSS IN2 COME.—

3 ‘‘(A) IN GENERAL.—The dollar amount in 

4 paragraph (2)(A) and the dollar amount in 

5 paragraph (2)(B) (in each case as increased 

6 under paragraph (3)) shall each be reduced (but 

7 not below zero) by an amount which bears the 

8 same ratio to such dollar amount as—

9 ‘‘(i) the excess of—

10 ‘‘(I) the taxpayer’s adjusted gross 

11 income for such taxable year, over 

12 ‘‘(II) the applicable dollar 

13 amount, bears to 

14 ‘‘(ii) $10,000 ($20,000 in the case of a 

15 joint return for a taxable year beginning 

16 after December 31, 2006). 

17 ‘‘(B) NO REDUCTION BELOW $200 UNTIL

18 COMPLETE PHASE-OUT.—No dollar amount shall 

19 be reduced below $200 under subparagraph (A) 

20 unless (without regard to this subparagraph) 

21 such limitation is reduced to zero. 
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1 ‘‘(C) ROUNDING.—Any amount determined 

2 under this paragraph which is not a multiple of 

3 $10 shall be rounded to the next lowest $10. 

4 ‘‘(D) ADJUSTED GROSS INCOME.—For pur5 poses of this paragraph, adjusted gross income 

6 shall be determined—

7 ‘‘(i) without regard to this section or 

8 section 911, and 

9 ‘‘(ii) after application of sections 86, 

10 135, 137, 219, 221, 222, and 469. 

11 ‘‘(E) APPLICABLE DOLLAR AMOUNT.—For 

12 purposes of this paragraph, the term ‘applicable 

13 dollar amount’ has the meaning given such term 

14 in section 219(g)(3)(B). The rule of section 

15 219(g)(4) (relating to special rule for married 

16 individuals filing separately and living apart) 

17 shall apply for purposes of the preceding sen18 tence. 

19 ‘‘(5) COORDINATION WITH OTHER CONTRIBU20 TIONS.—The limitation which would (but for this 

21 paragraph) apply under this subsection to the tax22 payer for any taxable year shall be reduced (but not 

23 below zero) by the sum of—

24 ‘‘(A) the aggregate amount which would 

25 (but for section 125(h)(1)(B) and subsections (b) 
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1 and (d) of section 106) be includible in the tax2 payer’s gross income for such taxable year, and 

3 ‘‘(B) the aggregate amount paid during 

4 such taxable year by such individual to Archer 

5 MSAs of such individual. 

6 ‘‘(6) SPECIAL RULES FOR MARRIED INDIVIDUALS, 

7 DEPENDENTS, AND MEDICARE ELIGIBLE INDIVID8 UALS.—Rules similar to the rules of paragraphs (3), 

9 (6), and (7) of section 220(b) shall apply for purposes 

10 of this section. 

11 ‘‘(c) DEFINITIONS.—For purposes of this section— 

12 ‘‘(1) ELIGIBLE INDIVIDUAL.— 

13 ‘‘(A) IN GENERAL.—The term ‘eligible indi14 vidual’ means, with respect to any month, any 

15 individual unless such individual is covered, as 

16 of the first day of such month, under any health 

17 plan which is not a minimum deductible plan. 

18 ‘‘(B) CERTAIN COVERAGE DISREGARDED.—

19 Subparagraph (A) shall be applied without re20 gard to— 

21 ‘‘(i) coverage for any benefit provided 

22 by permitted insurance, and 

23 ‘‘(ii) coverage (whether through insur24 ance or otherwise) for accidents, disability, 

25 dental care, vision care, or long-term care. 
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1 ‘‘(2) MINIMUM DEDUCTIBLE PLAN.—

2 ‘‘(A) IN GENERAL.—The term ‘minimum 

3 deductible plan’ means a health plan— 

4 ‘‘(i) in the case of self-only coverage, 

5 which has an annual deductible which is 

6 not less than $500, and 

7 ‘‘(ii) in the case of family coverage, 

8 which has an annual deductible which is 

9 not less than twice the dollar amount in 

10 clause (i) (as increased under subparagraph 

11 (B)). 

12 ‘‘(B) COST-OF-LIVING ADJUSTMENT FOR AN13 NUAL DEDUCTIBLES.—

14 ‘‘(i) IN GENERAL.—In the case of any 

15 taxable year beginning in a calendar year 

16 after 2004, the $500 amount in subpara17 graph (A)(i) shall be increased by an 

18 amount equal to—

19 ‘‘(I) such dollar amount, multi20 plied by 

21 ‘‘(II) the cost-of-living adjustment 

22 determined under section 1(f)(3) for 

23 the calendar year in which such tax24 able year begins by substituting ‘cal-
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1 endar year 2003’ for ‘calendar year 

2 1992’ in subparagraph (B) thereof. 

3 ‘‘(ii) ROUNDING.—If any increase 

4 under clause (i) is not a multiple of $50, 

5 such increase shall be rounded to the nearest 

6 multiple of $50. 

7 ‘‘(C) SPECIAL RULES.— 

8 ‘‘(i) EXCLUSION OF CERTAIN PLANS.—

9 Such term does not include a health plan if 

10 substantially all of its coverage is coverage 

11 described in paragraph (1)(B).

12 ‘‘(ii) SAFE HARBOR FOR ABSENCE OF

13 PREVENTIVE CARE DEDUCTIBLE.—A plan 

14 shall not fail to be treated as a minimum 

15 deductible plan by reason of failing to have 

16 a deductible for preventive care. 

17 ‘‘(3) PERMITTED INSURANCE.—The term ‘per18 mitted insurance’ has the meaning given such term in 

19 section 220(c)(3). 

20 ‘‘(4) FAMILY COVERAGE.—The term ‘family cov21 erage’ has the meaning given such term in section 

22 220(c)(5). 

23 ‘‘(5) ARCHER MSA.—The term ‘Archer MSA’ has 

24 the meaning given such term in section 220(d). 
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1 ‘‘(d) HEALTH SAVINGS ACCOUNT.—For purposes of 

2 this section—

3 ‘‘(1) IN GENERAL.—The term ‘health savings ac4 count’ means a trust created or organized in the 

5 United States as a health savings account exclusively 

6 for the purpose of paying the qualified medical ex7 penses of the account beneficiary, but only if the writ8 ten governing instrument creating the trust meets the 

9 following requirements: 

10 ‘‘(A) Except in the case of a rollover con11 tribution from an Archer MSA, or a health sav12 ings account, which is not includible in gross in13 come, no contribution will be accepted— 

14 ‘‘(i) unless it is in cash and is contrib15 uted by—

16 ‘‘(I) the account beneficiary, 

17 ‘‘(II) a member of the family of 

18 the account beneficiary, or 

19 ‘‘(III) an employer of the account 

20 beneficiary, and 

21 ‘‘(ii) to the extent such contribution, 

22 when added to previous contributions to the 

23 trust for the calendar year, exceeds the dol24 lar amount in subsection (b)(2)(B) in25 creased by the additional contribution 
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1 amount for taxable years beginning in such 

2 calendar year. 

3 ‘‘(B) The trustee is a bank (as defined in 

4 section 408(n)), an insurance company (as de5 fined in section 816), or another person who 

6 demonstrates to the satisfaction of the Secretary 

7 that the manner in which such person will ad8 minister the trust will be consistent with the re9 quirements of this section. 

10 ‘‘(C) No part of the trust assets will be in11 vested in life insurance contracts. 

12 ‘‘(D) The assets of the trust will not be com13 mingled with other property except in a common 

14 trust fund or common investment fund. 

15 ‘‘(E) The interest of an individual in the 

16 balance in his account is nonforfeitable. 

17 ‘‘(2) MEMBER OF THE FAMILY.—The term ‘mem18 ber of the family’ has the meaning given such term 

19 in section 2032A(e)(2). 

20 ‘‘(3) QUALIFIED MEDICAL EXPENSES.—The term 

21 ‘qualified medical expenses’ has the meaning given 

22 such term in section 220(d)(2), except that—

23 ‘‘(A) subparagraph (B)(i) thereof shall not 

24 apply to—
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1 ‘‘(i) insurance which constitutes a 

2 minimum deductible plan if no portion of 

3 the cost of such insurance is paid by an em4 ployer or former employer of the account 

5 beneficiary or the spouse of such bene6 ficiary, and 

7 ‘‘(ii) any health insurance (other than 

8 health insurance substantially all of its cov9 erage is coverage described in subsection 

10 (c)(1)(B)) if the account beneficiary has at11 tained age 65, and 

12 ‘‘(B) subparagraph (C) thereof shall not 

13 apply for purposes of this section. 

14 ‘‘(4) ACCOUNT BENEFICIARY.—The term ‘account 

15 beneficiary’ means the individual on whose behalf the 

16 health savings account was established. 

17 ‘‘(5) CERTAIN RULES TO APPLY.—Rules similar 

18 to the following rules shall apply for purposes of this 

19 section: 

20 ‘‘(A) Section 219(d)(2) (relating to no de21 duction for rollovers). 

22 ‘‘(B) Section 219(f)(3) (relating to time 

23 when contributions deemed made). 
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1 ‘‘(C) Except as provided in section 106(d), 

2 section 219(f)(5) (relating to employer pay3 ments). 

4 ‘‘(D) Section 408(g) (relating to community 

5 property laws). 

6 ‘‘(E) Section 408(h) (relating to custodial 

7 accounts). 

8 ‘‘(6) CONTRIBUTIONS FROM FLEXIBLE SPENDING

9 ACCOUNTS TREATED AS MADE BY THE EMPLOYER.—

10 Any contribution from a flexible spending account to 

11 a health savings account which is not includible in 

12 the gross income of the employee by reason of section

13 125(h) shall be treated as a contribution made by the 

14 employer for purposes of this section. 

15 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—

16 ‘‘(1) IN GENERAL.—A health savings account is 

17 exempt from taxation under this subtitle unless such 

18 account has ceased to be a health savings account. 

19 Notwithstanding the preceding sentence, any such ac20 count is subject to the taxes imposed by section 511 

21 (relating to imposition of tax on unrelated business 

22 income of charitable, etc. organizations). 

23 ‘‘(2) ACCOUNT TERMINATIONS.—Rules similar to 

24 the rules of paragraphs (2) and (4) of section 408(e) 

25 shall apply to health savings accounts, and any 
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1 amount treated as distributed under such similar 

2 rules shall be treated as not used to pay qualified 

3 medical expenses. 

4 ‘‘(f) TAX TREATMENT OF DISTRIBUTIONS.—

5 ‘‘(1) AMOUNTS USED FOR QUALIFIED MEDICAL

6 EXPENSES.—Any amount paid or distributed out of 

7 a health savings account which is used exclusively to 

8 pay qualified medical expenses of any account bene9 ficiary shall not be includible in gross income. 

10 ‘‘(2) INCLUSION OF AMOUNTS NOT USED FOR

11 QUALIFIED MEDICAL EXPENSES.—

12 ‘‘(A) IN GENERAL.—Any amount paid or 

13 distributed out of a health savings account which 

14 is not used exclusively to pay the qualified med15 ical expenses of the account beneficiary shall be 

16 included in the gross income of such beneficiary 

17 in the manner provided under section 72. 

18 ‘‘(B) SPECIAL RULES FOR APPLYING SEC19 TION 72.—For purposes of applying section 72 to 

20 any amount described in subparagraph (A)—

21 ‘‘(i) all health savings accounts shall be 

22 treated as 1 contract, 

23 ‘‘(ii) all distributions during any tax24 able year shall be treated as 1 distribution, 
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1 ‘‘(iii) the value of the contract, income 

2 on the contract, and investment in the con3 tract shall be computed as of the close of the 

4 calendar year in which the taxable year be5 gins, and 

6 ‘‘(iv) such distributions shall be treated 

7 as made from contributions from members 

8 of the family of the account beneficiary to 

9 the extent that such distribution, when 

10 added to all previous distributions from the 

11 health savings account taken into account 

12 under this clause, do not exceed the aggre13 gate contributions from members of such 

14 family. 

15 ‘‘(3) EXCESS CONTRIBUTIONS RETURNED BE16 FORE DUE DATE OF RETURN.— 

17 ‘‘(A) IN GENERAL.—If any excess contribu18 tion is contributed for a taxable year to any 

19 health savings account of an individual, para20 graph (2) shall not apply to distributions from 

21 the health savings accounts of such individual 

22 (to the extent such distributions do not exceed the 

23 aggregate excess contributions to all such ac24 counts of such individual for such year) if—
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1 ‘‘(i) such distribution is made on or 

2 before the last day prescribed by law (in3 cluding extensions of time) for filing the ac4 count beneficiary’s return for such taxable 

5 year, 

6 ‘‘(ii) no deduction is allowed under 

7 this section with respect to such contribu8 tion, 

9 ‘‘(iii) such distribution is accompanied 

10 by the amount of net income attributable to 

11 such excess contribution, and 

12 ‘‘(iv) such distribution satisfies the re13 quirements of subparagraph (B). 

14 ‘‘(B) RULES RELATED TO ORDERING.—

15 ‘‘(i) DISTRIBUTIONS LIMITED TO CON16 TRIBUTIONS.—Subparagraph (A) shall 

17 apply to distributions to a person only to 

18 the extent of the contributions of such per19 son to such accounts during such taxable 

20 year. 

21 ‘‘(ii) CLASSES OF CONTRIBUTORS.—

22 Subparagraph (A) shall apply only to dis23 tributions of such contributions which are 

24 made in the following order: 
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1 ‘‘(I) first, to members of the fam2 ily of the account beneficiary, 

3 ‘‘(II) second, to the account bene4 ficiary, 

5 ‘‘(III) third, to employers of the 

6 account beneficiary with respect to 

7 contributions under section 125(h), 

8 and 

9 ‘‘(IV) fourth, to employers of the 

10 account beneficiary with respect to 

11 contributions under section 106(d). 

12 ‘‘(iii) LAST-IN FIRST-OUT.—If dis13 tributions could be made to more than one 

14 person under any subclause of clause (ii),

15 subparagraph (A) shall not apply to any 

16 such distribution unless such distribution is 

17 of the most recent excess contribution which 

18 has not been distributed to the contributor. 

19 ‘‘(C) TREATMENT OF NET INCOME.—Any 

20 net income described in subparagraph (A)(iii) 

21 shall be included in the gross income of the per22 son receiving the distribution for the taxable 

23 year in which received. 

24 ‘‘(D) EXCESS CONTRIBUTION.—For pur25 poses of subparagraph (A), the term ‘excess con-
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1 tribution’ means any contribution (other than a 

2 rollover contribution from another health savings 

3 account, or from an Archer MSA, which is not 

4 includible in gross income) to the extent such 

5 contribution results in the aggregate contribu6 tions to health savings accounts of the account 

7 beneficiary for the taxable year to be in excess of 

8 the limitation under subsection (b) (determined 

9 without regard to paragraph (5) thereof) which 

10 applies to such beneficiary for such year. 

11 ‘‘(4) ADDITIONAL TAX ON DISTRIBUTIONS NOT

12 USED FOR QUALIFIED MEDICAL EXPENSES.— 

13 ‘‘(A) IN GENERAL.—The tax imposed by 

14 this chapter on the account beneficiary for any 

15 taxable year in which there is a payment or dis16 tribution from a health savings account of such 

17 beneficiary which is includible in gross income 

18 under paragraph (2) shall be increased by 15 

19 percent of the amount which is so includible. 

20 ‘‘(B) EXCEPTION FOR DISABILITY OR

21 DEATH.—Subparagraph (A) shall not apply if 

22 the payment or distribution is made after the ac23 count beneficiary becomes disabled within the 

24 meaning of section 72(m)(7) or dies. 
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1 ‘‘(C) EXCEPTION FOR DISTRIBUTIONS

2 AFTER MEDICARE ELIGIBILITY.—Subparagraph 

3 (A) shall not apply to any payment or distribu4 tion after the date on which the account bene5 ficiary attains the age specified in section 1811 

6 of the Social Security Act. 

7 ‘‘(5) SPECIAL RULES.—Rules similar to the rules 

8 of paragraphs (5), (6), (7), and (8) of section 220(f) 

9 shall apply for purposes of this section. 

10 ‘‘(g) REPORTS.—The Secretary may require the trustee 

11 of a health savings account to make such reports regarding 

12 such account to the Secretary and to the account beneficiary 

13 with respect to contributions, distributions, and such other 

14 matters as the Secretary determines appropriate. The re15 ports required by this subsection shall be filed at such time 

16 and in such manner and furnished to such individuals at 

17 such time and in such manner as may be required by the 

18 Secretary. 

19 ‘‘(h) REGULATIONS.—The Secretary may issue regula20 tions to carry out the purposes of this section, including 

21 regulations regarding the proper treatment of distributions 

22 described in subsection (f)(3) and nondeductible contribu23 tions by members of the family of the account beneficiary.’’. 

24 (b) DEDUCTION ALLOWED WHETHER OR NOT INDI25 VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a) of 
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1 section 62 of such Code is amended by inserting after para2 graph (18) the following new paragraph: 

3 ‘‘(19) HEALTH SAVINGS ACCOUNTS.—The deduc4 tion allowed by section 223.’’. 

5 (c) ROLLOVERS FROM ARCHER MSAS PERMITTED.—

6 Subparagraph (A) of section 220(f)(5) of such Code (relat7 ing to rollover contribution) is amended by inserting ‘‘or 

8 a health savings account (as defined in section 223(d))’’ 

9 after ‘‘paid into an Archer MSA’’. 

10 (d) EXCLUSIONS FOR EMPLOYER CONTRIBUTIONS TO

11 HEALTH SAVINGS ACCOUNTS.—

12 (1) EXCLUSION FROM INCOME TAX.—Section 106 

13 of such Code (relating to contributions by employer to 

14 accident and health plans) is amended by adding at 

15 the end the following new subsection: 

16 ‘‘(d) CONTRIBUTIONS TO HEALTH SAVINGS AC17 COUNTS.— 

18 ‘‘(1) IN GENERAL.—In the case of an employee 

19 who is an eligible individual, amounts contributed by 

20 such employee’s employer to any health savings ac21 count of such employee shall be treated as employer22 provided coverage for medical expenses under an acci23 dent or health plan to the extent such amounts do not 

24 exceed the excess of—
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1 ‘‘(A) the limitation under section 223(b) 

2 (determined without regard to this subsection) 

3 which is applicable to such employee for such 

4 taxable year, over 

5 ‘‘(B) the aggregate amount treated as em6 ployer-provided coverage for medical expenses 

7 under an accident or health plan under sub8 section (b). 

9 ‘‘(2) SPECIAL RULES.—Rules similar to the rules 

10 of paragraphs (2), (3), (4), and (5) of subsection (b) 

11 shall apply for purposes of this subsection. 

12 ‘‘(3) DEFINITIONS.—For purposes of this sub13 section, the terms ‘eligible individual’ and ‘health sav14 ings account’ have the respective meanings given to 

15 such terms by section 223.

16 ‘‘(4) CROSS REFERENCE.—

‘‘For penalty on failure by employer to make comparable contributions to the health savings accounts 

of comparable employees, see section 4980G.’’.

17 (2) EXCLUSION FROM EMPLOYMENT TAXES.—

18 (A) RAILROAD RETIREMENT TAX.—Sub19 section (e) of section 3231 of such Code is 

20 amended by adding at the end the following new 

21 paragraph: 

22 ‘‘(11) HEALTH SAVINGS ACCOUNT CONTRIBU23 TIONS.—The term ‘compensation’ shall not include 

24 any payment made to or for the benefit of an em-
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1 ployee if at the time of such payment it is reasonable 

2 to believe that the employee will be able to exclude 

3 such payment from income under section 106(d).’’. 

4 (B) UNEMPLOYMENT TAX.—Subsection (b) 

5 of section 3306 of such Code is amended by strik6 ing ‘‘or’’ at the end of paragraph (16), by strik7 ing the period at the end of paragraph (17) and 

8 inserting ‘‘; or’’, and by inserting after para9 graph (17) the following new paragraph: 

10 ‘‘(18) any payment made to or for the benefit of 

11 an employee if at the time of such payment it is rea12 sonable to believe that the employee will be able to ex13 clude such payment from income under section 

14 106(d).’’. 

15 (C) WITHHOLDING TAX.—Subsection (a) of 

16 section 3401 of such Code is amended by striking 

17 ‘‘or’’ at the end of paragraph (20), by striking 

18 the period at the end of paragraph (21) and in19 serting ‘‘; or’’, and by inserting after paragraph 

20 (21) the following new paragraph: 

21 ‘‘(22) any payment made to or for the benefit of 

22 an employee if at the time of such payment it is rea23 sonable to believe that the employee will be able to ex24 clude such payment from income under section 

25 106(d).’’. 
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1 (3) EMPLOYER CONTRIBUTIONS REQUIRED TO BE

2 SHOWN ON W–2.—Subsection (a) of section 6051 of 

3 such Code is amended by striking ‘‘and’’ at the end 

4 of paragraph (10), by striking the period at the end 

5 of paragraph (11) and inserting ‘‘, and’’, and by in6 serting after paragraph (11) the following new para7 graph: 

8 ‘‘(12) the amount contributed to any health sav9 ings account (as defined in section 223(d)) of such 

10 employee or such employee’s spouse.’’. 

11 (4) PENALTY FOR FAILURE OF EMPLOYER TO

12 MAKE COMPARABLE HEALTH SAVINGS ACCOUNT CON13 TRIBUTIONS.—

14 (A) IN GENERAL.—Chapter 43 of such Code 

15 is amended by adding after section 4980F the 

16 following new section: 

17 ‘‘SEC. 4980G. FAILURE OF EMPLOYER TO MAKE COM18 PARABLE HEALTH SAVINGS ACCOUNT CON19 TRIBUTIONS. 

20 ‘‘(a) GENERAL RULE.—In the case of an employer who 

21 makes a contribution to the health savings account of any 

22 employee with respect to coverage under a minimum de23 ductible plan of the employer during a calendar year, there 

24 is hereby imposed a tax on the failure of such employer 
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1 to meet the requirements of subsection (d) for such calendar 

2 year. 

3 ‘‘(b) AMOUNT OF TAX.—The amount of the tax im4 posed by subsection (a) on any failure for any calendar 

5 year is the amount equal to 35 percent of the aggregate 

6 amount contributed by the employer to health savings ac7 counts of employees for taxable years of such employees end8 ing with or within such calendar year. 

9 ‘‘(c) WAIVER BY SECRETARY.—In the case of a failure 

10 which is due to reasonable cause and not to willful neglect, 

11 the Secretary may waive part or all of the tax imposed by 

12 subsection (a) to the extent that the payment of such tax 

13 would be excessive relative to the failure involved. 

14 ‘‘(d) EMPLOYER REQUIRED TO MAKE COMPARABLE

15 HEALTH SAVINGS ACCOUNT CONTRIBUTIONS FOR ALL PAR16 TICIPATING EMPLOYEES.—An employer meets the require17 ments of this subsection for any calendar year if the em18 ployer meets the requirements of section 4980E(d) applied 

19 by—

20 ‘‘(1) substituting ‘health savings account’ for ‘Ar21 cher MSA’ each place it appears, and 

22 ‘‘(2) not taking into account any contribution 

23 made under section 125. 

24 ‘‘(e) CONTROLLED GROUPS.—For purposes of this sec25 tion, all persons treated as a single employer under sub-
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1 section (b), (c), (m), or (o) of section 414 shall be treated 

2 as 1 employer. 

3 ‘‘(f) DEFINITIONS.—Terms used in this section which 

4 are also used in section 223 have the respective meanings 

5 given such terms in section 223.’’. 

6 (B) CLERICAL AMENDMENT.—The table of 

7 sections for chapter 43 of such Code is amended 

8 by adding after the item relating to section 

9 4980F the following new item:

‘‘Sec. 4980G. Failure of employer to make comparable health savings account 

contributions.’’.

10 (e) TAX ON EXCESS CONTRIBUTIONS.—Section 4973 

11 of such Code (relating to tax on excess contributions to cer12 tain tax-favored accounts and annuities) is amended—

13 (1) by striking ‘‘or’’ at the end of paragraph (3) 

14 of subsection (a), 

15 (2) by inserting ‘‘or’’ at the end of paragraph (4) 

16 of subsection (a), 

17 (3) by inserting after paragraph (4) of sub18 section (a) the following new paragraph: 

19 ‘‘(5) a health savings account (within the mean20 ing of section 223(d)),’’, and 

21 (4) by adding at the end the following new sub22 section: 

23 ‘‘(g) EXCESS CONTRIBUTIONS TO HEALTH SAVINGS

24 ACCOUNTS.—For purposes of this section, in the case of 
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1 health savings accounts (within the meaning of section 

2 223(d)), the term ‘excess contributions’ means the sum of—

3 ‘‘(1) the aggregate amount contributed for the 

4 taxable year to the accounts (other than a rollover 

5 contribution from another health savings account, or 

6 from an Archer MSA, which is not includible in gross 

7 income) which is in excess of the limitation under sec8 tion 223(b) (determined without regard to paragraph 

9 (5) thereof), and 

10 ‘‘(2) the amount determined under this sub11 section for the preceding taxable year, reduced by the 

12 sum of—

13 ‘‘(A) the distributions out of the accounts 

14 which were included in gross income under sec15 tion 223(f)(2), and 

16 ‘‘(B) the excess (if any) of—

17 ‘‘(i) the sum of limitations described in 

18 paragraph (1), over 

19 ‘‘(ii) the amount contributed to the ac20 counts for the taxable year. 

21 For purposes of this subsection, any contribution which is 

22 distributed out of the health savings account in a distribu23 tion to which section 223(f)(3) applies shall be treated as 

24 an amount not contributed.’’. 

25 (f) TAX ON PROHIBITED TRANSACTIONS.—
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1 (1) Section 4975 of such Code (relating to tax on 

2 prohibited transactions) is amended by adding at the 

3 end of subsection (c) the following new paragraph: 

4 ‘‘(6) SPECIAL RULE FOR HEALTH SAVINGS AC5 COUNTS.—An individual for whose benefit a health 

6 savings account (within the meaning of section 

7 223(d)) is established shall be exempt from the tax 

8 imposed by this section with respect to any trans9 action concerning such account (which would other10 wise be taxable under this section) if, with respect to 

11 such transaction, the account ceases to be a health 

12 savings account by reason of the application of sec13 tion 223(e)(2) to such account.’’. 

14 (2) Paragraph (1) of section 4975(e) of such 

15 Code is amended by redesignating subparagraphs (E) 

16 and (F) as subparagraphs (F) and (G), respectively, 

17 and by inserting after subparagraph (D) the following 

18 new subparagraph: 

19 ‘‘(E) a health savings account described in 

20 section 223(d),’’. 

21 (g) FAILURE TO PROVIDE REPORTS ON HEALTH SAV22 INGS ACCOUNTS.—Paragraph (2) of section 6693(a) of such 

23 Code (relating to reports) is amended by redesignating sub24 paragraphs (C) and (D) as subparagraphs (D) and (E), 
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1 respectively, and by inserting after subparagraph (B) the 

2 following new subparagraph: 

3 ‘‘(C) section 223(g) (relating to health sav4 ings accounts),’’. 

5 (h) EXCEPTION FROM CAPITALIZATION OF POLICY AC6 QUISITION EXPENSES.—Subparagraph (B) of section 

7 848(e)(1) of such Code (defining specified insurance con8 tract) is amended by striking ‘‘and’’ at the end of clause 

9 (iii), by striking the period at the end of clause (iv) and 

10 inserting ‘‘, and’’, and by adding at the end the following 

11 new clause: 

12 ‘‘(v) any contract which is a health 

13 savings account (as defined in section 

14 223(d)).’’. 

15 (i) HEALTH SAVINGS ACCOUNTS MAY BE OFFERED

16 UNDER CAFETERIA PLANS.—Paragraph (2) of section 

17 125(d) (relating to cafeteria plan defined) is amended by 

18 adding at the end the following new subparagraph: 

19 ‘‘(D) EXCEPTION FOR HEALTH SAVINGS AC20 COUNTS.—Subparagraph (A) shall not apply to 

21 a plan to the extent of amounts which a covered 

22 employee may elect to have the employer pay as 

23 contributions to a health savings account estab24 lished on behalf of the employee.’’. 

25 (j) CONFORMING AMENDMENTS.—
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1 (1) The table of sections for part VII of sub2 chapter B of chapter 1 of such Code is amended by 

3 striking the last item and inserting the following:

‘‘Sec. 223. Health savings accounts. 

‘‘Sec. 224. Cross reference.’’.

4 (2)(A) Sections 86(b)(2)(A), 135(c)(4)(A), 

5 137(b)(3)(A), 219(g)(3)(A)(ii), and 221(b)(2)(C)(i) 

6 are each amended by inserting ‘‘223,’’ after ‘‘222,’’. 

7 (B) Section 222(b)(2)(C)(i) is amended by in8 serting ‘‘223,’’ before ‘‘911’’. 

9 (C) Section 469(i)(3)(F)(iii) is amended by 

10 striking ‘‘and 222’’ and inserting ‘‘222, and 223’’.

11 (k) EFFECTIVE DATE.—The amendments made by this 

12 section shall apply to taxable years beginning after Decem13 ber 31, 2003. 

14 SEC. 3. DISPOSITION OF UNUSED HEALTH BENEFITS IN 

15 CAFETERIA PLANS AND FLEXIBLE SPENDING 

16 ARRANGEMENTS. 

17 (a) IN GENERAL.—Section 125 of the Internal Revenue 

18 Code of 1986 (relating to cafeteria plans) is amended by 

19 redesignating subsections (h) and (i) as subsections (i) and 

20 (j), respectively, and by inserting after subsection (g) the 

21 following: 

22 ‘‘(h) CONTRIBUTIONS OF CERTAIN UNUSED HEALTH

23 BENEFITS.—
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1 ‘‘(1) IN GENERAL.—For purposes of this title, a 

2 plan or other arrangement shall not fail to be treated 

3 as a cafeteria plan solely because qualified benefits 

4 under such plan include a health flexible spending ar5 rangement under which not more than $500 of un6 used health benefits may be—

7 ‘‘(A) carried forward to the succeeding plan 

8 year of such health flexible spending arrange9 ment, 

10 ‘‘(B) to the extent permitted by section 223, 

11 contributed on behalf of the employee to a health 

12 savings account (as defined in section 223(d)) 

13 maintained for the benefit of such employee, or 

14 ‘‘(C) contributed to a qualified retirement 

15 plan (as defined in section 4974(c)), or an eligi16 ble deferred compensation plan (as defined in 

17 section 457(b)) of an eligible employer described 

18 in section 457(e)(1)(A), but only to the extent 

19 such amount would not be allowed as a deduc20 tion under section 223 if made directly by the 

21 employee to a health savings account of the em22 ployee (determined without regard to any other 

23 contributions made by the employee). 
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1 ‘‘(2) SPECIAL RULES FOR TREATMENT OF CON2 TRIBUTIONS TO RETIREMENT PLANS.—For purposes 

3 of this title, contributions under paragraph (1)(C)—

4 ‘‘(A) shall be treated as elective deferrals (as 

5 defined in section 402(g)(3)) in the case of con6 tributions to a qualified cash or deferred ar7 rangement (as defined in section 401(k)) or to 

8 an annuity contract described in section 403(b), 

9 ‘‘(B) shall be treated as employer contribu10 tions in the case of a plan (other than a plan 

11 described in subparagraph (A)) which is de12 scribed in section 401(a) which includes a trust 

13 exempt from tax under section 501(a), 

14 ‘‘(C) shall be treated as deferred compensa15 tion in the case of contributions to an eligible de16 ferred compensation plan (as defined in section 

17 457(b)), and 

18 ‘‘(D) shall be treated in the manner des19 ignated for purposes of section 408 or 408A in 

20 the case of contributions to an individual retire21 ment plan. 

22 ‘‘(3) HEALTH FLEXIBLE SPENDING ARRANGE23 MENT.—For purposes of this subsection, the term 

24 ‘health flexible spending arrangement’ means a flexi25 ble spending arrangement (as defined in section 
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1 106(c)) that is a qualified benefit and only permits 

2 reimbursement for expenses for medical care (as de3 fined in section 213(d)(1) (without regard to subpara4 graphs (C) and (D) thereof). 

5 ‘‘(4) UNUSED HEALTH BENEFITS.—For purposes 

6 of this subsection, with respect to an employee, the 

7 term ‘unused health benefits’ means the excess of—

8 ‘‘(A) the maximum amount of reimburse9 ment allowable to the employee during a plan 

10 year under a health flexible spending arrange11 ment, taking into account any election by the 

12 employee, over 

13 ‘‘(B) the actual amount of reimbursement 

14 during such year under such arrangement.’’. 

15 (b) EFFECTIVE DATE.—The amendment made by sub16 section (a) shall apply to taxable years beginning after De17 cember 31, 2003. 

18 SEC. 4. EXCEPTION TO INFORMATION REPORTING RE19 QUIREMENTS RELATED TO CERTAIN HEALTH 

20 ARRANGEMENTS. 

21 (a) IN GENERAL.—Section 6041 (relating to informa22 tion at source) is amended by adding at the end the fol23 lowing new subsection: 

24 ‘‘(f) SECTION DOES NOT APPLY TO CERTAIN HEALTH

25 ARRANGEMENTS.—This section shall not apply to any pay-
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1 ment for medical care (as defined in section 213(d)) made 

2 under—

3 ‘‘(1) a flexible spending arrangement (as defined 

4 in section 106(c)(2)), or 

5 ‘‘(2) a health reimbursement arrangement which 

6 is treated as employer-provided coverage under an ac7 cident or health plan for purposes of section 106.’’. 

8 (b) EFFECTIVE DATE.—The amendment made by this 

9 section shall apply to payments made after December 31, 

10 2002.
Union Calendar No. 89

108TH CONGRESS 

1ST SESSION H. R. 2351

[Report No. 108–177] 

A BILL

To amend the Internal Revenue Code of 1986 to 

allow a deduction to individuals for amounts contributed to health savings accounts and to provide for the disposition of unused health benefits in cafeteria plans and flexible spending arrangements. 

JUNE 25, 2003

Reported with an amendment, committed to the Committee of the Whole House on the State of the Union, 

and ordered to be printed