I

104TH CONGRESS

1ST SESSION H. R. 323

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

contributions to a medical savings account, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 4, 1995

Mr. MCINTOSH introduced the following bill; which was referred to the

Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to allow a

deduction for contributions to a medical savings account,

and for other purposes.

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 Care Savings

5 Plan Act of 1995’’.

6 TITLE I—MEDICAL SAVINGS

7 ACCOUNTS

8 SEC. 101. MEDICAL SAVINGS ACCOUNTS.

9 (a) IN GENERAL.—Part VII of subchapter B of chap10 ter 1 of the Internal Revenue Code of 1986 (relating to
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1 additional itemized deductions for individuals) is amended

2 by redesignating section 220 as section 221 and by insert3 ing after section 219 the following new section:

4 ‘‘SEC. 220. MEDICAL SAVINGS ACCOUNTS.

5 ‘‘(a) DEDUCTION ALLOWED.—In the case of an eligi6 ble individual, there shall be allowed as a deduction

7 amounts paid in cash during the taxable year by or on

8 behalf of such individual to a medical savings account.

9 ‘‘(b) LIMITATION.—

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

11 deduction under subsection (a) to an individual for

12 the taxable year shall not exceed the excess (if any)

13 of—

14 ‘‘(A) the lesser of—

15 ‘‘(i) the applicable limit, or

16 ‘‘(ii) the compensation (as defined in

17 section 219(f)) includible in the individ18 ual’s gross income for the taxable year,

19 over

20 ‘‘(B) the sum of—

21 ‘‘(i) the value of employer-provided

22 coverage for the medical expenses of such

23 individual,

24 ‘‘(ii) the amount paid by the individ25 ual (other than from amounts distributed
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1 from a medical savings account) for cov2 erage under qualified catastrophic coverage

3 health plan for coverage for such individ4 ual, the spouse of such individual, and de5 pendents (as defined in section 152) of

6 such individual, plus

7 ‘‘(iii) the aggregate amount contrib8 uted to such account during the taxable

9 year pursuant to section 125(d)(3).

10 ‘‘(2) APPLICABLE LIMIT.—For purposes of

11 paragraph (1), the applicable limit is the sum of—

12 ‘‘(A) $4,800, plus

13 ‘‘(B) $600 for each individual who is a de14 pendent (as defined in section 152) of the indi15 vidual for whose benefit the account is estab16 lished.

17 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur18 poses of this section—

19 ‘‘(1) MEDICAL SAVINGS ACCOUNT.—The term

20 ‘medical savings account’ means a trust created or

21 organized in the United States exclusively for the

22 purpose of paying the qualified medical expenses of

23 the individual for whose benefit the trust is estab24 lished, but only if the written governing instrument

25 creating the trust meets the following requirements:
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1 ‘‘(A) No contribution will be accepted un2 less it is in cash and contributions will not be

3 accepted for any taxable year in excess of the

4 applicable limit (as defined in subsection

5 (b)(2)).

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

7 section 408(n)) or another person who dem8 onstrates to the satisfaction of the Secretary

9 that the manner in which such person will ad10 minister the trust will be consistent with the re11 quirements of this section.

12 ‘‘(C) No part of the trust assets will be in13 vested in life insurance contracts.

14 ‘‘(D) The assets of the trust will not be

15 commingled with other property except in a

16 common trust fund or common investment

17 fund.

18 ‘‘(2) ELIGIBLE INDIVIDUAL.—The term ‘eligible

19 individual’ means any individual if—

20 ‘‘(A) such individual is not covered by any

21 employer-provided group health plan, or

22 ‘‘(B) such individual is covered by an em23 ployer-provided group health plan which is a

24 qualified catastrophic coverage health plan and

25 is not covered by any other health plan.
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1 ‘‘(3) QUALIFIED MEDICAL EXPENSES.—

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

3 medical expenses’ means medical expenses other

4 than amounts paid for a health plan which is

5 not a qualified catastrophic coverage health

6 plan.

7 ‘‘(B) MEDICAL EXPENSES.—The term

8 ‘medical expenses’ means amounts paid by the

9 individual for whose benefit the account was es10 tablished for medical care (as defined in section

11 213) of such individual, the spouse of such indi12 vidual, and any dependent (as defined in section

13 152) of such individual, but only to the extent

14 such amounts are not compensated for by in15 surance or otherwise.

16 ‘‘(4) QUALIFIED CATASTROPHIC COVERAGE

17 HEALTH PLAN.—The term ‘qualified catastrophic

18 coverage health plan’ means any health plan which

19 is certified by the Secretary of Health and Human

20 Services as a plan—

21 ‘‘(A) which provides no compensation for

22 medical expenses not exceeding $1,500 during

23 any year,

24 ‘‘(5) TIME WHEN CONTRIBUTIONS DEEMED

25 MADE.—A taxpayer shall be deemed to have made a
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1 contribution on the last day of the preceding taxable

2 year if the contribution is made on account of such

3 taxable year and is made not later than the time

4 prescribed by law for filing the return for such tax5 able year (not including extensions thereof).

6 ‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—

7 ‘‘(1) IN GENERAL.—Except as otherwise pro8 vided in this subsection, any amount paid or distrib9 uted out of a medical savings account shall be in10 cluded in the gross income of the individual for

11 whose benefit such account was established unless

12 such amount is used exclusively to pay the qualified

13 medical expenses of such individual.

14 ‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE15 FORE DUE DATE OF RETURN.—Paragraph (1) shall

16 not apply to the distribution of any contribution paid

17 during a taxable year to a medical savings account

18 to the extent that such contribution exceeds the

19 amount allowable as a deduction under subsection

20 (a) if—

21 ‘‘(A) such distribution is received on or be22 fore the day prescribed by law (including exten23 sions of time) for filing such individual’s return

24 for such taxable year,
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1 ‘‘(B) no deduction is allowed under sub2 section (a) with respect to such excess contribu3 tion, and

4 ‘‘(C) such distribution is accompanied by

5 the amount of net income attributable to such

6 excess contribution.

7 Any net income described in subparagraph (C) shall

8 be included in the gross income of the individual for

9 the taxable year in which it is received.

10 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—

11 ‘‘(1) ACCOUNT TAXED AS GRANTOR TRUST.—

12 ‘‘(A) IN GENERAL.—The individual for

13 whose benefit a medical savings account is es14 tablished shall be treated for purposes of this

15 title as the owner thereof and shall be subject

16 to tax thereon in accordance with subpart E of

17 part I of subchapter J of this chapter (relating

18 to grantors and others treated as substantial

19 owners).

20 ‘‘(B) EXCLUSION FROM GROSS INCOME

21 FOR $300 OF EARNINGS.—Notwithstanding sub22 paragraph (A), an amount shall be includible in

23 the gross income of an individual for a taxable

24 year by reason of subparagraph (A) only to the

25 extent such amount exceeds $300.
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1 ‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE

2 INDIVIDUAL ENGAGES IN PROHIBITED TRANS3 ACTION.—

4 ‘‘(A) IN GENERAL.—If, during any taxable

5 year of the individual for whose benefit the

6 medical savings account was established, such

7 individual engages in any transaction prohibited

8 by section 4975 with respect to the account, the

9 account ceases to be a medical savings account

10 as of the first day of that taxable year.

11 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

12 ALL ITS ASSETS.—In any case in which any ac13 count ceases to be a medical savings account by

14 reason of subparagraph (A) on the first day of

15 any taxable year, paragraph (1) of subsection

16 (d) applies as if there were a distribution on

17 such first day in an amount equal to the fair

18 market value (on such first day) of all assets in

19 the account (on such first day).

20 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU21 RITY.—If, during any taxable year, the individual for

22 whose benefit a medical savings account was estab23 lished uses the account or any portion thereof as se24 curity for a loan, the portion so used is treated as

25 distributed to that individual.
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1 ‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN2 CLUDED IN GROSS INCOME.—

3 ‘‘(1) DISTRIBUTION NOT USED FOR QUALIFIED

4 MEDICAL EXPENSES.—If a distribution from a medi5 cal savings account is made, and not used to pay the

6 qualified medical expenses of the individual for

7 whose benefit the account was established, the tax li8 ability of such individual for the taxable year in

9 which such distribution is received shall be increased

10 by an amount equal to 10 percent of the amount of

11 the distribution which is includible in gross income

12 for such taxable year.

13 ‘‘(2) DISQUALIFICATION CASES.—If an amount

14 is includible in the gross income of an individual for

15 a taxable year under subsection (e), his tax under

16 this chapter for such taxable year shall be increased

17 by an amount equal to 10 percent of such amount

18 includible in his gross income.

19 ‘‘(3) PENALTY-FREE WITHDRAWALS TO EX20 TENT AMOUNTS IN ACCOUNT EXCEED $15,000.—

21 ‘‘(A) IN GENERAL.—Paragraph (1), and

22 paragraph (2) to the extent it relates to sub23 section (e)(3), shall not apply to the extent that

24 the sum of—
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1 ‘‘(i) the amount remaining in the

2 medical savings accounts of such individual

3 immediately after the distribution, plus

4 ‘‘(ii) the amount remaining at such

5 time in the medical savings accounts of the

6 spouse (if any) of such individual,

7 has a value at such time is at least $15,000.

8 ‘‘(B) LOWER LIMIT FOR INDIVIDUALS AT9 TAINING SOCIAL SECURITY RETIREMENT AGE.—

10 The $15,000 amount in subparagraph (A) shall

11 be reduced by $1,000 for each year by which

12 the age (as of the close of the taxable year) of

13 the individual for whose benefit the account was

14 established exceeds retirement age (as defined

15 in section 216(l) of the Social Security Act).

16 ‘‘(4) DISABILITY OR DEATH CASES.—Para17 graphs (1) and (2) do not apply if the payment or

18 distribution is made after the individual for whose

19 benefit the medical savings account was established

20 becomes disabled within the meaning of section

21 72(m)(7) or dies.

22 ‘‘(g) SPECIAL RULES.—

23 ‘‘(1) COMMUNITY PROPERTY LAWS.—This sec24 tion shall be applied without regard to any commu25 nity property laws.
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1 ‘‘(2) CUSTODIAL ACCOUNTS.—For purposes of

2 this section, a custodial account shall be treated as

3 a trust if—

4 ‘‘(A) the assets of such account are held by

5 a bank (as defined in section 408(n)) or an6 other person who demonstrates to the satisfac7 tion of the Secretary that the manner in which

8 he will administer the account will be consistent

9 with the requirements of this section, and

10 ‘‘(B) the custodial account would, except

11 for the fact that it is not a trust, constitute a

12 medical savings account described in subsection

13 (c).

14 For purposes of this title, in the case of a custodial

15 account treated as a trust by reason of the preceding

16 sentence, the custodian of such account shall be

17 treated as the trustee thereof.

18 ‘‘(3) DENIAL OF DEDUCTIONS.—No amount

19 paid or distributed from a medical savings account

20 shall be taken into account in determining the de21 duction provided by section 213.

22 ‘‘(h) INFLATION ADJUSTMENT.—

23 ‘‘(1) IN GENERAL.—In the case of any taxable

24 year beginning in a calendar year after 1995, each
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1 applicable dollar amount shall be increased by an

2 amount equal to—

3 ‘‘(A) such dollar amount, multiplied by

4 ‘‘(B) the cost-of-living adjustment for the

5 calendar year in which the taxable year begins.

6 ‘‘(2) COST-OF-LIVING ADJUSTMENT.—For pur7 poses of paragraph (1), the cost-of-living adjustment

8 for any calendar year is the percentage (if any) by

9 which—

10 ‘‘(A) the deemed average total wages (as

11 defined in section 209(k) of the Social Security

12 Act) for the preceding calendar year, exceeds

13 ‘‘(B) the deemed average total wages (as

14 so defined) for calendar year 1994.

15 ‘‘(3) APPLICABLE DOLLAR AMOUNT.—For pur16 poses of paragraph (1), the term ‘applicable dollar

17 amount’ means—

18 ‘‘(A) the $4,800 and $600 amounts in sub19 section (b),

20 ‘‘(B) the $1,500 amounts in subsection

21 (c)(4),

22 ‘‘(C) the $300 amount in subsection (e)(1),

23 and

24 ‘‘(D) the $15,000 amount in subsection

25 (f)(3).
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1 ‘‘(4) ROUNDING.—If any amount as adjusted

2 under paragraph (1) is not a multiple of $10, such

3 amount shall be rounded to the nearest multiple of

4 $10 (or, if such amount is a multiple of $5 and not

5 of $10, such amount shall be rounded to the next

6 highest multiple of $10).

7 ‘‘(i) REPORTS.—The trustee of a medical savings ac8 count shall make such reports regarding such account to

9 the Secretary and to the individual for whose benefit the

10 account is maintained with respect to contributions, dis11 tributions, and such other matters as the Secretary may

12 require under regulations. The reports required by this

13 subsection shall be filed at such time and in such manner

14 and furnished to such individuals at such time and in such

15 manner as may be required by those regulations.’’

16 (b) DEDUCTION ALLOWED IN ARRIVING AT AD17 JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)

18 of such Code (relating to retirement savings) is amend19 ed—

20 (1) by inserting ‘‘OR MEDICAL EXPENSE’’ after

21 ‘‘RETIREMENT’’ in the heading of such paragraph,

22 and

23 (2) by inserting before the period at the end

24 thereof the following: ‘‘and the deduction allowed by
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1 section 220 (relating to deduction of certain pay2 ments to medical savings accounts)’’.

3 (c) EXCLUSION OF EMPLOYER CONTRIBUTIONS TO

4 MEDICAL SAVINGS ACCOUNTS FROM EMPLOYMENT

5 TAXES.—

6 (1) SOCIAL SECURITY TAXES.—

7 (A) Subsection (a) of section 3121 of such

8 Code is amended by striking ‘‘or’’ at the end of

9 paragraph (20), by striking the period at the

10 end of paragraph (21) and inserting ‘‘; or’’, and

11 by inserting after paragraph (21) the following

12 new paragraph:

13 ‘‘(22) remuneration paid to or on behalf of

14 an employee if (and to the extent that) at the

15 time of payment of such remuneration it is rea16 sonable to believe that a corresponding deduc17 tion is allowable under section 220.’’

18 (B) Subsection (a) of section 209 of the

19 Social Security Act is amended by striking ‘‘or’’

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

21 period at the end of paragraph (18) and insert22 ing ‘‘; or’’, and by inserting after paragraph

23 (18) the following new paragraph:

24 ‘‘(19) remuneration paid to or on behalf of an

25 employee if (and to the extent that) at the time of
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1 payment of such remuneration it is reasonable to be2 lieve that a corresponding deduction is allowable

3 under section 220 of the Internal Revenue Code of

4 1986.’’

5 (2) RAILROAD RETIREMENT TAX.—Subsection

6 (e) of section 3231 of such Code is amended by add7 ing at the end thereof the following new paragraph:

8 ‘‘(10) EMPLOYER CONTRIBUTIONS TO MEDICAL

9 SAVINGS ACCOUNTS.—The term ‘compensation’ shall

10 not include any payment made to or on behalf of an

11 employee if (and to the extent that) at the time of

12 payment of such remuneration it is reasonable to be13 lieve that a corresponding deduction is allowable

14 under section 220.’’

15 (3) UNEMPLOYMENT TAX.—Subsection (b) of

16 section 3306 of such Code is amended by striking

17 ‘‘or’’ at the end of paragraph (15), by striking the

18 period at the end of paragraph (16) and inserting ‘‘;

19 or’’, and by inserting after paragraph (16) the fol20 lowing new paragraph:

21 ‘‘(17) remuneration paid to or on behalf of

22 an employee if (and to the extent that) at the

23 time of payment of such remuneration it is rea24 sonable to believe that a corresponding deduc25 tion is allowable under section 220.’’
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1 (4) WITHHOLDING TAX.—Subsection (a) of sec2 tion 3401 of such Code is amended by striking ‘‘or’’

3 at the end of paragraph (19), by striking the period

4 at the end of paragraph (20) and inserting ‘‘; or’’,

5 and by inserting after paragraph (20) the following

6 new paragraph:

7 ‘‘(21) remuneration paid to or on behalf of

8 an employee if (and to the extent that) at the

9 time of payment of such remuneration it is rea10 sonable to believe that a corresponding deduc11 tion is allowable under section 220.’’

12 (d) TAX ON EXCESS CONTRIBUTIONS.—Section 4973

13 of such Code (relating to tax on excess contributions to

14 individual retirement accounts, certain section 403(b) con15 tracts, and certain individual retirement annuities) is

16 amended—

17 (1) by inserting ‘‘MEDICAL SAVINGS AC18 COUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading of

19 such section,

20 (2) by redesignating paragraph (2) of sub21 section (a) as paragraph (3) and by inserting after

22 paragraph (1) the following:

23 ‘‘(2) a medical savings account (within the

24 meaning of section 220(c)),’’,
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1 (3) by striking ‘‘or’’ at the end of paragraph

2 (1) of subsection (a), and

3 (4) by adding at the end thereof the following

4 new subsection:

5 ‘‘(d) EXCESS CONTRIBUTIONS TO MEDICAL SAVINGS

6 ACCOUNTS.—For purposes of this section, in the case of

7 a medical savings account, the term ‘excess contributions’

8 means the amount by which the amount contributed for

9 the taxable year to the account exceeds the amount allow10 able as a deduction under section 220 for such taxable

11 year. For purposes of this subsection, any contribution

12 which is distributed out of the medical savings account

13 and a distribution to which section 220(d)(2) applies shall

14 be treated as an amount not contributed.’’

15 (e) TAX ON PROHIBITED TRANSACTIONS.—Section

16 4975 of such Code (relating to prohibited transactions)

17 is amended—

18 (1) by adding at the end of subsection (c) the

19 following new paragraph:

20 ‘‘(4) SPECIAL RULE FOR MEDICAL SAVINGS AC21 COUNTS.—An individual for whose benefit a medical

22 savings account is established shall be exempt from

23 the tax imposed by this section with respect to any

24 transaction concerning such account (which would

25 otherwise be taxable under this section) if, with re-
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1 spect to such transaction, the account ceases to be

2 a medical savings account by reason of the applica3 tion of section 220(e)(2)(A) to such account.’’, and

4 (2) by inserting ‘‘or a medical savings account

5 described in section 220(c)’’ in subsection (e)(1)

6 after ‘‘described in section 408(a)’’.

7 (f) FAILURE TO PROVIDE REPORTS ON MEDICAL

8 SAVINGS ACCOUNTS.—Section 6693 of such Code (relat9 ing to failure to provide reports on individual retirement

10 account or annuities) is amended—

11 (1) by inserting ‘‘OR ON MEDICAL SAVINGS

12 ACCOUNTS’’ after ‘‘ANNUITIES’’ in the heading of

13 such section, and

14 (2) by adding at the end of subsection (a) the

15 following: ‘‘The person required by section 220(i) to

16 file a report regarding a medical savings account at

17 the time and in the manner required by such section

18 shall pay a penalty of $50 for each failure unless it

19 is shown that such failure is due to reasonable

20 cause.’’

21 (g) CLERICAL AMENDMENTS.—

22 (1) The table of sections for part VII of sub23 chapter B of chapter 1 of such Code is amended by

24 striking the item relating to section 220 and insert25 ing the following:

‘‘Sec. 220. Medical savings accounts.
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‘‘Sec. 221. Cross reference.’’

1 (2) The table of sections for chapter 43 of such

2 Code is amended by striking the item relating to sec3 tion 4973 and inserting the following:

‘‘Sec. 4973. Tax on excess contributions to individual retirement

accounts, medical savings accounts, certain 403(b)

contracts, and certain individual retirement annuities.’’

4 (3) The table of sections for subchapter B of

5 chapter 68 of such Code is amended by inserting ‘‘or

6 on medical savings accounts’’ after ‘‘annuities’’ in

7 the item relating to section 6693.

8 (h) EFFECTIVE DATE.—The amendments made by

9 this section shall apply to taxable years beginning after

10 December 31, 1995.

11 SEC. 102. UNUSED AMOUNTS IN FLEXIBLE SPENDING AC12 COUNTS TRANSFERABLE TO MEDICAL SAV13 INGS ACCOUNTS.

14 (a) IN GENERAL.—Subsection (d) of section 125 of

15 the Internal Revenue Code of 1986 (relating to cafeteria

16 plans) is amended by adding at the end thereof the follow17 ing new paragraph:

18 ‘‘(3) UNUSED AMOUNTS TRANSFERABLE TO

19 MEDICAL SAVINGS ACCOUNTS.—

20 ‘‘(A) IN GENERAL.—Subsection (a) shall

21 not fail to apply to a participant in a plan, and

22 a plan shall not fail to be treated as a cafeteria
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1 plan, solely because under the plan amounts not

2 paid out as reimbursements under a flexible

3 spending arrangement for health and disability

4 for the benefit of an individual are contributed

5 to a medical savings account (as defined in sec6 tion 220(c)) for the benefit of such individual.

7 ‘‘(B) SPECIAL RULES.—

8 ‘‘(i) TIMING OF CONTRIBUTIONS.—

9 Contributions made under this paragraph

10 shall be made on the last day of the plan

11 year of the cafeteria plan.

12 ‘‘(ii) AVAILABILITY REQUIREMENT.—

13 Subparagraph (A) shall apply only if the

14 plan is available to at least 80 percent of

15 the employees of the employer. For pur16 poses of the preceding sentence, there shall

17 be excluded employees who are excluded

18 under section 414(q)(8) or who would be

19 so excluded if ‘30’ were substituted for

‘171 20 ⁄2’ in subparagraph (B) thereof.’’

21 (b) EFFECTIVE DATE.—The amendment made by

22 this section shall apply to taxable years beginning after

23 December 31, 1995.
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1 SEC. 103. DEDUCTION FOR AMOUNTS PAID FOR QUALIFIED

2 CATASTROPHIC COVERAGE HEALTH PLAN.

3 (a) IN GENERAL.—Section 213 of the Internal Reve4 nue Code of 1986 (relating to medical, dental, etc., ex5 penses) is amended by adding at the end thereof the fol6 lowing new subsection:

7 ‘‘(g) FULL DEDUCTION FOR AMOUNTS PAID FOR

8 QUALIFIED CATASTROPHIC COVERAGE HEALTH

9 PLANS.—In the case of amounts paid for coverage under

10 a qualified catastrophic coverage health plan (as defined

11 in section 220(c))—

12 ‘‘(1) subsection (a) shall be applied without re13 gard to the limitation based on adjusted gross in14 come, and

15 ‘‘(2) such amounts shall not be taken into ac16 count in determining whether any other amounts are

17 allowable as a deduction under this section.’’

18 (b) TECHNICAL AMENDMENT.—Paragraph (2) of

19 section 162(l) of such Code is amended by adding at the

20 end thereof the following new subparagraph:

21 ‘‘(C) QUALIFIED CATASTROPHIC COV22 ERAGE.—Paragraph (1) shall not apply to any

23 amount allowed as a deduction under section

24 213 for amounts paid for coverage under a

25 qualified catastrophic coverage health plan (as

26 defined in section 220(c)).’’
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1 (c) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1995.

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