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[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2596 Introduced in House (IH)]

108th CONGRESS
  1st Session
                                H. R. 2596

  To amend the Internal Revenue Code of 1986 to allow a deduction to 
individuals for amounts contributed to health savings security accounts 
 and health savings accounts, to provide for the disposition of unused 
health benefits in cafeteria plans and flexible spending arrangements, 
                        and for other purposes.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                             June 25, 2003

  Mr. Thomas 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 to 
individuals for amounts contributed to health savings security accounts 
 and health savings accounts, to provide for the disposition of unused 
health benefits in cafeteria plans and flexible spending arrangements, 
                        and for other purposes.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Health Savings and Affordability Act 
of 2003''.

SEC. 2. HEALTH SAVINGS SECURITY ACCOUNTS AND HEALTH SAVINGS ACCOUNTS.

    (a) In General.--Part VII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to additional itemized 
deductions for individuals) is amended by redesignating section 223 as 
section 225 and by inserting after section 222 the following new 
sections:

``SEC. 223. HEALTH SAVINGS SECURITY ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual who is an 
eligible individual for any month during the taxable year, there shall 
be allowed as a deduction for the taxable year an amount equal to the 
aggregate amount paid in cash during such taxable year by such 
individual to a health savings security account of such individual.
    ``(b) Limitations.--
            ``(1) In general.--The amount allowable as a deduction 
        under subsection (a) to an individual for the taxable year 
        shall not exceed the sum of the monthly limitations for months 
        during such taxable year that the individual is an eligible 
        individual.
            ``(2) Monthly limitation.--The monthly limitation for any 
        month is \1/12\ of--
                    ``(A) $2,000, in the case of an eligible individual 
                who--
                            ``(i) has self-only coverage under a 
                        minimum deductible plan as of the first day of 
                        such month, or
                            ``(ii) is uninsured as of the first day of 
                        such month and is not described in subparagraph 
                        (B)(ii) with respect to the taxable year which 
                        includes such month,
                    ``(B) $4,000, in the case of an eligible individual 
                who--
                            ``(i) has family coverage under a minimum 
                        deductible plan as of the first day of such 
                        month, or
                            ``(ii) is uninsured as of the first day of 
                        such month and, with respect to the taxable 
                        year which includes such month--
                                    ``(I) is entitled to a deduction 
                                for a dependent under section 151(c) 
                                (or would be so entitled but for 
                                paragraph (2) or (4) of section 
                                152(e)), or
                                    ``(II) files a joint return, and
                    ``(C) zero in any other case.
            ``(3) Additional contributions for individuals 55 or 
        older.--
                    ``(A) In general.--In the case of an individual who 
                has attained the age of 55 before the close of the 
                taxable year, paragraph (2) shall be applied by 
                increasing the $2,000 amount in paragraph (2)(A) and 
                the $4,000 amount in paragraph (2)(B) by the additional 
                contribution amount.
                    ``(B) Additional contribution amount.--For purposes 
                of this section, the additional contribution amount is 
                the amount determined in accordance with the following 
                table:

``For taxable years                                      The additional
beginning in:                                   contribution amount is:
    2004..........................................                $500 
    2005..........................................                $600 
    2006..........................................                $700 
    2007..........................................                $800 
    2008..........................................                $900 
    2009 and thereafter...........................              $1,000.

            ``(4) Limitation based on adjusted gross income.--
                    ``(A) Self-only coverage.--The dollar amount in 
                paragraph (2)(A) (as increased under paragraph (3)) 
                shall be reduced (but not below zero) by an amount 
                which bears the same ratio to such dollar amount as--
                            ``(i) the amount (if any) by which the 
                        taxpayer's adjusted gross income for such 
                        taxable year exceeds $75,000 ($150,000 in the 
                        case of a joint return), bears to
                            ``(ii) $10,000 ($20,000 in the case of a 
                        joint return).
                    ``(B) Family coverage.--The dollar amount in 
                paragraph (2)(B) (as increased under paragraph (3)) 
                shall be reduced (but not below zero) by an amount 
                which bears the same ratio to such dollar amount as--
                            ``(i) the amount (if any) by which the 
                        taxpayer's adjusted gross income for such 
                        taxable year exceeds $150,000, bears to
                            ``(ii) $20,000.
                    ``(C) No reduction below $200 until complete phase-
                out.--No dollar amount shall be reduced below $200 
                under subparagraph (A) or (B) unless (without regard to 
                this subparagraph) such limitation is reduced to zero.
                    ``(D) Rounding.--Any amount determined under this 
                paragraph which is not a multiple of $10 shall be 
                rounded to the next lowest $10.
                    ``(E) Adjusted gross income.--For purposes of this 
                paragraph, adjusted gross income shall be determined--
                            ``(i) without regard to this section or 
                        section 911, and
                            ``(ii) after application of sections 86, 
                        135, 137, 219, 221, 222, and 469.
            ``(5) Coordination with other contributions.--The 
        limitation which would (but for this paragraph) apply under 
        this subsection to the taxpayer for any taxable year shall be 
        reduced (but not below zero) by the sum of--
                    ``(A) the aggregate amount paid during such taxable 
                year to Archer MSAs of such individual,
                    ``(B) the aggregate amount paid during such taxable 
                year to health savings accounts of such individual, and
                    ``(C) the aggregate amount paid during such taxable 
                year to health savings security accounts of such 
                individual by persons other than such individual.
            ``(6) Special rules for married individuals, dependents, 
        and medicare eligible individuals.--Rules similar to the rules 
        of paragraphs (3), (6), and (7) of section 220(b) shall apply 
        for purposes of this section.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Eligible individual.--
                    ``(A) In general.--The term `eligible individual' 
                means, with respect to any month, any individual unless 
                such individual is covered, as of the first day of such 
                month, under any health plan which is not a minimum 
                deductible plan.
                    ``(B) Certain coverage disregarded.--Subparagraph 
                (A) shall be applied without regard to--
                            ``(i) coverage for any benefit provided by 
                        permitted insurance, and
                            ``(ii) coverage (whether through insurance 
                        or otherwise) for accidents, disability, dental 
                        care, vision care, or long-term care.
            ``(2) Minimum deductible plan.--
                    ``(A) In general.--The term `minimum deductible 
                plan' means a health plan--
                            ``(i) in the case of self-only coverage, 
                        which has an annual deductible which is not 
                        less than $500, and
                            ``(ii) in the case of family coverage, 
                        which has an annual deductible which is not 
                        less than twice the dollar amount in clause (i) 
                        (as increased under subparagraph (B)).
                    ``(B) Cost-of-living adjustment for annual 
                deductibles.--
                            ``(i) In general.--In the case of any 
                        taxable year beginning in a calendar year after 
                        2004, the $500 amount in subparagraph (A)(i) 
                        shall be increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for the calendar year in which 
                                such taxable year begins by 
                                substituting `calendar year 2003' for 
                                `calendar year 1992' in subparagraph 
                                (B) thereof.
                            ``(ii) Rounding.--If any increase under 
                        clause (i) is not a multiple of $50, such 
                        increase shall be rounded to the nearest 
                        multiple of $50.
                    ``(C) Special rules.--
                            ``(i) Exclusion of certain plans.--Such 
                        term does not include a health plan if 
                        substantially all of its coverage is coverage 
                        described in paragraph (1)(B).
                            ``(ii) Safe harbor for absence of 
                        preventive care deductible.--A plan shall not 
                        fail to be treated as a minimum deductible plan 
                        by reason of failing to have a deductible for 
                        preventive care.
            ``(3) Uninsured.--An individual shall be treated as 
        uninsured if such individual is not covered by insurance which 
        constitutes medical care. The preceding sentence shall be 
        applied without regard to the coverage described in paragraph 
        (1)(B).
            ``(4) Permitted insurance.--The term `permitted insurance' 
        has the meaning given such term in section 220(c)(3).
            ``(5) Family coverage.--The term `family coverage' has the 
        meaning given such term in section 220(c)(5).
            ``(6) Archer msa.--The term `Archer MSA' has the meaning 
        given such term in section 220(d).
            ``(7) Health Savings Account.--The term `health savings 
        account' has the meaning given such term in section 224(d).
    ``(d) Health Savings Security Account.--For purposes of this 
section--
            ``(1) In general.--The term `health savings security 
        account' means a trust created or organized in the United 
        States as a health savings security account exclusively for the 
        purpose of paying the qualified medical expenses of the account 
        beneficiary, but only if the written governing instrument 
        creating the trust meets the following requirements:
                    ``(A) Except in the case of a rollover contribution 
                from an Archer MSA, or a health savings security 
                account, which is not includible in gross income, no 
                contribution will be accepted--
                            ``(i) unless it is in cash and is 
                        contributed by--
                                    ``(I) the account beneficiary,
                                    ``(II) a member of the family of 
                                the account beneficiary, or
                                    ``(III) an employer of the account 
                                beneficiary, and
                            ``(ii) to the extent such contribution, 
                        when added to previous contributions to the 
                        trust for the calendar year, exceeds the 
                        highest annual limitation which could apply to 
                        an individual under subsection (b) for a 
                        taxable year beginning in such calendar year.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)), an insurance company (as defined in section 
                816), or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                in life insurance contracts.
                    ``(D) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(E) The interest of an individual in the balance 
                in his account is nonforfeitable.
            ``(2) Member of the family.--The term `member of the 
        family' has the meaning given such term in section 2032A(e)(2).
            ``(3) Qualified medical expenses.--The term `qualified 
        medical expenses' has the meaning given such term in section 
        220(d)(2), except that--
                    ``(A) subparagraph (B)(i) thereof shall not apply 
                to--
                            ``(i) insurance which constitutes a minimum 
                        deductible plan if no portion of the cost of 
                        such insurance is paid by an employer or former 
                        employer of the account beneficiary or the 
                        spouse of such beneficiary, and
                            ``(ii) any health insurance (other than 
                        health insurance substantially all of its 
                        coverage is coverage described in subsection 
                        (c)(1)(B)) if the account beneficiary has 
                        attained age 65, and
                    ``(B) subparagraph (C) thereof shall not apply for 
                purposes of this section.
            ``(4) Account beneficiary.--The term `account beneficiary' 
        means the individual on whose behalf the health savings 
        security account was established.
            ``(5) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this section:
                    ``(A) Section 219(d)(2) (relating to no deduction 
                for rollovers).
                    ``(B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                    ``(C) Except as provided in section 106(d), section 
                219(f)(5) (relating to employer payments).
                    ``(D) Section 408(g) (relating to community 
                property laws).
                    ``(E) Section 408(h) (relating to custodial 
                accounts).
            ``(6) Contributions from flexible spending accounts treated 
        as made by the employer.--Any contribution from a flexible 
        spending account to a health savings security account which is 
        not includible in the gross income of the employee by reason of 
        section 125(h) shall be treated as a contribution made by the 
        employer for purposes of this section.
    ``(e) Tax Treatment of Accounts.--
            ``(1) In general.--A health savings security account is 
        exempt from taxation under this subtitle unless such account 
        has ceased to be a health savings security account. 
        Notwithstanding the preceding sentence, any such account is 
        subject to the taxes imposed by section 511 (relating to 
        imposition of tax on unrelated business income of charitable, 
        etc. organizations).
            ``(2) Account terminations.--Rules similar to the rules of 
        paragraphs (2) and (4) of section 408(e) shall apply to health 
        savings security accounts, and any amount treated as 
        distributed under such similar rules shall be treated as not 
        used to pay qualified medical expenses.
    ``(f) Tax Treatment of Distributions.--
            ``(1) Amounts used for qualified medical expenses.--Any 
        amount paid or distributed out of a health savings security 
        account which is used exclusively to pay qualified medical 
        expenses of any account beneficiary shall not be includible in 
        gross income.
            ``(2) Inclusion of amounts not used for qualified medical 
        expenses.--
                    ``(A) In general.--Any amount paid or distributed 
                out of a health savings security account which is not 
                used exclusively to pay the qualified medical expenses 
                of the account beneficiary shall be included in the 
                gross income of such beneficiary in the manner provided 
                under section 72.
                    ``(B) Special rules for applying section 72.--For 
                purposes of applying section 72 to any amount described 
                in subparagraph (A)--
                            ``(i) all health savings security accounts 
                        shall be treated as 1 contract,
                            ``(ii) all distributions during any taxable 
                        year shall be treated as 1 distribution,
                            ``(iii) the value of the contract, income 
                        on the contract, and investment in the contract 
                        shall be computed as of the close of the 
                        calendar year in which the taxable year begins, 
                        and
                            ``(iv) such distributions shall be treated 
                        as made from contributions from members of the 
                        family of the account beneficiary to the extent 
                        that such distribution, when added to all 
                        previous distributions from the health savings 
                        security account taken into account under this 
                        clause, do not exceed the aggregate 
                        contributions from members of such family.
            ``(3) Excess contributions returned before due date of 
        return.--
                    ``(A) In general.--If any excess contribution is 
                contributed for a taxable year to any health savings 
                security account of an individual, paragraph (2) shall 
                not apply to distributions from the health savings 
                security accounts of such individual (to the extent 
                such distributions do not exceed the aggregate excess 
                contributions to all such accounts of such individual 
                for such year) if--
                            ``(i) such distribution is made on or 
                        before the last day prescribed by law 
                        (including extensions of time) for filing the 
                        account beneficiary's return for such taxable 
                        year,
                            ``(ii) no deduction is allowed under this 
                        section with respect to such contribution,
                            ``(iii) such distribution is accompanied by 
                        the amount of net income attributable to such 
                        excess contribution, and
                            ``(iv) such distribution satisfies the 
                        requirements of subparagraph (B).
                    ``(B) Rules related to ordering.--
                            ``(i) Distributions limited to 
                        contributions.--Subparagraph (A) shall apply to 
                        distributions to a person only to the extent of 
                        the contributions of such person to such 
                        accounts during such taxable year.
                            ``(ii) Classes of contributors.--
                        Subparagraph (A) shall apply only to 
                        distributions of such contributions which are 
                        made in the following order:
                                    ``(I) first, to members of the 
                                family of the account beneficiary,
                                    ``(II) second, to the account 
                                beneficiary,
                                    ``(III) third, to employers of the 
                                account beneficiary with respect to 
                                contributions under section 125(h), and
                                    ``(IV) fourth, to employers of the 
                                account beneficiary with respect to 
                                contributions under section 106(d).
                            ``(iii) Last-in first-out.--If 
                        distributions could be made to more than one 
                        person under any subclause of clause (ii), 
                        subparagraph (A) shall not apply to any such 
                        distribution unless such distribution is of the 
                        most recent excess contribution which has not 
                        been distributed to the contributor.
                    ``(C) Treatment of net income.--Any net income 
                described in subparagraph (A)(iii) shall be included in 
                the gross income of the person receiving the 
                distribution for the taxable year in which received.
                    ``(D) Excess contribution.--For purposes of 
                subparagraph (A), the term `excess contribution' means 
                any contribution (other than a rollover contribution 
                from another health savings security account, or from 
                an Archer MSA, which is not includible in gross income) 
                to the extent such contribution results in the 
                aggregate contributions to health savings security 
                accounts of the account beneficiary for the taxable 
                year to be in excess of the limitation under subsection 
                (b) (determined without regard to paragraph (5)(C) 
                thereof) which applies to such beneficiary for such 
                year.
            ``(4) Additional tax on distributions not used for 
        qualified medical expenses.--
                    ``(A) In general.--The tax imposed by this chapter 
                on the account beneficiary for any taxable year in 
                which there is a payment or distribution from a health 
                savings security account of such beneficiary which is 
                includible in gross income under paragraph (2) shall be 
                increased by 15 percent of the amount which is so 
                includible.
                    ``(B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment or 
                distribution is made after the account beneficiary 
                becomes disabled within the meaning of section 72(m)(7) 
                or dies.
                    ``(C) Exception for distributions after medicare 
                eligibility.--Subparagraph (A) shall not apply to any 
                payment or distribution after the date on which the 
                account beneficiary attains the age specified in 
                section 1811 of the Social Security Act.
            ``(5) Rollover contribution.--
                    ``(A) In general.--Paragraph (2) shall not apply to 
                any amount paid or distributed from a health savings 
                security account to the account beneficiary to the 
                extent the amount received is paid into a health 
                savings security account, or a health savings account, 
                for the benefit of such beneficiary not later than the 
                60th day after the day on which the beneficiary 
                receives the payment or distribution.
                    ``(B) Limitation.--This paragraph shall not apply 
                to any amount described in subparagraph (A) received by 
                an individual from a health savings security account 
                if, at any time during the 1-year period ending on the 
                day of such receipt, such individual received any other 
                amount described in subparagraph (A) from a health 
                savings security account which was not includible in 
                the individual's gross income because of the 
                application of this paragraph.
            ``(6) Special rules.--Rules similar to the rules of 
        paragraphs (6), (7), and (8) of section 220(f) shall apply for 
        purposes of this section.
    ``(g) Reports.--The Secretary may require the trustee of a health 
savings security account to make such reports regarding such account to 
the Secretary and to the account beneficiary with respect to 
contributions, distributions, and such other matters as the Secretary 
determines appropriate. The reports required by this subsection shall 
be filed at such time and in such manner and furnished to such 
individuals at such time and in such manner as may be required by the 
Secretary.
    ``(h) Regulations.--The Secretary may issue regulations to carry 
out the purposes of this section, including regulations regarding the 
proper treatment of distributions described in subsection (f)(3) and 
nondeductible contributions by members of the family of the account 
beneficiary.

``SEC. 224. HEALTH SAVINGS ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual who is an 
eligible individual for any month during the taxable year, there shall 
be allowed as a deduction for the taxable year an amount equal to the 
aggregate amount paid in cash during such taxable year by such 
individual to a health savings account of such individual.
    ``(b) Limitations.--
            ``(1) In general.--The amount allowable as a deduction 
        under subsection (a) to an individual for the taxable year 
        shall not exceed the sum of the monthly limitations for months 
        during such taxable year that the individual is an eligible 
        individual.
            ``(2) Monthly limitation.--The monthly limitation for any 
        month is the amount equal to \1/12\ of the annual deductible 
        (as of the first day of such month) of the individual's 
        coverage under the high deductible health plan.
            ``(3) Coordination with other contributions.--The 
        limitation which would (but for this paragraph) apply under 
        this subsection to the taxpayer for any taxable year shall be 
        reduced (but not below zero) by the sum of--
                    ``(A) the aggregate amount paid during such taxable 
                year to Archer MSAs of such individual,
                    ``(B) the aggregate amount paid during such taxable 
                year to health savings security accounts of such 
                individual, and
                    ``(C) the aggregate amount paid during such taxable 
                year to health savings accounts of such individual by 
                persons other than such individual.
            ``(4) Special rules for married individuals, dependents, 
        and medicare eligible individuals.--Rules similar to the rules 
        of paragraphs (3), (6), and (7) of section 220(b) shall apply 
        for purposes of this section.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Eligible individual.--
                    ``(A) In general.--The term `eligible individual' 
                means, with respect to any month, any individual if--
                            ``(i) such individual is covered under a 
                        high deductible health plan as of the 1st day 
                        of such month, and
                            ``(ii) such individual is not, while 
                        covered under a high deductible health plan, 
                        covered under any health plan--
                                    ``(I) which is not a high 
                                deductible health plan, and
                                    ``(II) which provides coverage for 
                                any benefit which is covered under the 
                                high deductible health plan.
                    ``(B) Certain coverage disregarded.--Subparagraph 
                (A)(ii) shall be applied without regard to--
                            ``(i) coverage for any benefit provided by 
                        permitted insurance, and
                            ``(ii) coverage (whether through insurance 
                        or otherwise) for accidents, disability, dental 
                        care, vision care, or long-term care.
            ``(2) High deductible health plan.--
                    ``(A) In general.--The term `high deductible health 
                plan' means a health plan--
                            ``(i) in the case of self-only coverage, 
                        which has an annual deductible which is not 
                        less than $1,000 and not more than $2,250,
                            ``(ii) in the case of family coverage, 
                        which has an annual deductible which is not 
                        less than $2,000 and not more than $4,500, and
                            ``(iii) the annual out-of-pocket expenses 
                        required to be paid under the plan (other than 
                        for premiums) for covered benefits does not 
                        exceed--
                                    ``(I) $3,000 for self-only 
                                coverage, and
                                    ``(II) $5,500 for family coverage.
                    ``(B) Cost-of-living adjustment.--
                            ``(i) In general.--In the case of any 
                        taxable year beginning in a calendar year after 
                        1998, each dollar amount in subparagraph (A) 
                        shall be increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for the calendar year in which 
                                such taxable year begins by 
                                substituting `calendar year 1997' for 
                                `calendar year 1992' in subparagraph 
                                (B) thereof.
                            ``(ii) Special rules.--In the case of the 
                        $1,000 amount in subparagraph (A)(i) and the 
                        $2,000 amount in subparagraph (A)(ii), 
                        subclause (i)(II) shall be applied by 
                        substituting `calendar year 2002' for `calendar 
                        year 1997'.
                            ``(iii) Rounding.--If any increase under 
                        clause (i) or (ii) is not a multiple of $50, 
                        such increase shall be rounded to the nearest 
                        multiple of $50.
                    ``(C) Special rules.--
                            ``(i) Exclusion of certain plans.--Such 
                        term does not include a health plan if 
                        substantially all of its coverage is coverage 
                        described in paragraph (1)(B).
                            ``(ii) Safe harbor for absence of 
                        preventive care deductible.-- A plan shall not 
                        fail to be treated as a high deductible health 
                        plan by reason of failing to have a deductible 
                        for preventive care.
                    ``(D) Treatment of network services.--
                            ``(i) In general.--In the case of a health 
                        plan which is a preferred provider organization 
                        plan and which would (without regard to 
                        services provided outside such organization's 
                        network of providers described in clause 
                        (iii)(I)) be a high deductible health plan, 
                        such plan shall not fail to be a high 
                        deductible health plan because--
                                    ``(I) the annual deductible for 
                                services provided outside such network 
                                exceeds the applicable maximum dollar 
                                amount in clause (i) or (ii) of 
                                subparagraph (A), or
                                    ``(II) the annual out-of-pocket 
                                expenses required to be paid for 
                                services provided outside such network 
                                exceeds the applicable dollar amount in 
                                subparagraph (A)(iii).
                            ``(ii) Annual deductible.--The annual 
                        deductible taken into account under subsection 
                        (b)(2) with respect to a plan which is a high 
                        deductible health plan by reason of clause (i) 
                        shall be the annual deductible for services 
                        provided within such network.
                            ``(iii) Preferred provider organization 
                        plan defined.--In this subparagraph, the term 
                        `preferred provider organization plan' means a 
                        health plan that--
                                    ``(I) has a network of providers 
                                that have agreed to a contractually 
                                specified reimbursement for covered 
                                benefits with the organization offering 
                                the plan,
                                    ``(II) provides for reimbursement 
                                for all covered benefits regardless of 
                                whether such benefits are provided 
                                within such network of providers, and
                                    ``(III) is offered by an 
                                organization that is not licensed or 
                                organized under State law as a health 
                                maintenance organization.
            ``(3) Permitted insurance.--The term `permitted insurance' 
        has the meaning given such term in section 220(c)(3).
            ``(4) Family coverage.--The term `family coverage' has the 
        meaning given such term in section 220(c)(5).
            ``(5) Archer msa.--The term `Archer MSA' has the meaning 
        given such term in section 220(d).
            ``(6) Health savings security account.--The term `health 
        savings security account' has the meaning given such term in 
        section 223(d).
    ``(d) Health Savings Account.--For purposes of this section--
            ``(1) In general.--The term `health savings account' means 
        a trust created or organized in the United States as a health 
        savings account exclusively for the purpose of paying the 
        qualified medical expenses of the account beneficiary, but only 
        if the written governing instrument creating the trust meets 
        the following requirements:
                    ``(A) Except in the case of a rollover contribution 
                from an Archer MSA, a health savings security account, 
                or a health savings account, which is not includible in 
                gross income, no contribution will be accepted--
                            ``(i) unless it is in cash and is 
                        contributed by--
                                    ``(I) the account beneficiary, or
                                    ``(II) an employer of the account 
                                beneficiary, and
                            ``(ii) to the extent such contribution, 
                        when added to previous contributions to the 
                        trust for the calendar year, exceeds the 
                        highest annual limitation which could apply to 
                        an individual under subsection (b) for a 
                        taxable year beginning in such calendar year.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)), an insurance company (as defined in section 
                816), or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                in life insurance contracts.
                    ``(D) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(E) The interest of an individual in the balance 
                in his account is nonforfeitable.
            ``(2) Qualified medical expenses.--The term `qualified 
        medical expenses' has the meaning given such term in section 
        220(d)(2).
            ``(3) Account beneficiary.--The term `account beneficiary' 
        means the individual on whose behalf the health savings account 
        was established.
            ``(4) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this section:
                    ``(A) Section 219(d)(2) (relating to no deduction 
                for rollovers).
                    ``(B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                    ``(C) Except as provided in section 106(d), section 
                219(f)(5) (relating to employer payments).
                    ``(D) Section 408(g) (relating to community 
                property laws).
                    ``(E) Section 408(h) (relating to custodial 
                accounts).
            ``(6) Contributions from flexible spending accounts treated 
        as made by the employer.--Any contribution from a flexible 
        spending account to a health savings account which is not 
        includible in the gross income of the employee by reason of 
        section 125(h) shall be treated as a contribution made by the 
        employer for purposes of this section.
    ``(e) Tax Treatment of Accounts.--
            ``(1) In general.--A health savings account is exempt from 
        taxation under this subtitle unless such account has ceased to 
        be a health savings account. Notwithstanding the preceding 
        sentence, any such account is subject to the taxes imposed by 
        section 511 (relating to imposition of tax on unrelated 
        business income of charitable, etc. organizations).
            ``(2) Account terminations.--Rules similar to the rules of 
        paragraphs (2) and (4) of section 408(e) shall apply to health 
        savings accounts, and any amount treated as distributed under 
        such rules shall be treated as not used to pay qualified 
        medical expenses.
    ``(f) Tax Treatment of Distributions.--
            ``(1) Amounts used for qualified medical expenses.--Any 
        amount paid or distributed out of a health savings account 
        which is used exclusively to pay qualified medical expenses of 
        any account beneficiary shall not be includible in gross 
        income.
            ``(2) Inclusion of amounts not used for qualified medical 
        expenses.--Any amount paid or distributed out of a health 
        savings account which is not used exclusively to pay the 
        qualified medical expenses of the account beneficiary shall be 
        included in the gross income of such beneficiary.
            ``(3) Excess contributions returned before due date of 
        return.--
                    ``(A) In general.--If any excess contribution is 
                contributed for a taxable year to any health savings 
                account of an individual, paragraph (2) shall not apply 
                to distributions from the health savings accounts of 
                such individual (to the extent such distributions do 
                not exceed the aggregate excess contributions to all 
                such accounts of such individual for such year) if--
                            ``(i) such distribution is made on or 
                        before the last day prescribed by law 
                        (including extensions of time) for filing the 
                        account beneficiary's return for such taxable 
                        year,
                            ``(ii) no deduction is allowed under this 
                        section with respect to such contribution,
                            ``(iii) such distribution is accompanied by 
                        the amount of net income attributable to such 
                        excess contribution, and
                            ``(iv) such distribution satisfies the 
                        requirements of subparagraph (B).
                    ``(B) Rules related to ordering.--
                            ``(i) Distributions limited to 
                        contributions.--Subparagraph (A) shall apply to 
                        distributions to a person only to the extent of 
                        the contributions of such person to such 
                        accounts during such taxable year.
                            ``(ii) Classes of contributors.--
                        Subparagraph (A) shall apply only to 
                        distributions of such contributions which are 
                        made in the following order:
                                    ``(I) first, to the account 
                                beneficiary,
                                    ``(II) second, to employers of the 
                                account beneficiary with respect to 
                                contributions under section 125(h), and
                                    ``(III) third, to employers of the 
                                account beneficiary with respect to 
                                contributions under section 106(d).
                            ``(iii) Last-in first-out.--If 
                        distributions could be made to more than one 
                        person under any subclause of clause (ii), 
                        subparagraph (A) shall not apply to any such 
                        distribution unless such distribution is of the 
                        most recent excess contribution which has not 
                        been distributed to the contributor.
                    ``(C) Treatment of net income.--Any net income 
                described in subparagraph (A)(iii) shall be included in 
                the gross income of the person receiving the 
                distribution for the taxable year in which received.
                    ``(D) Excess contribution.--For purposes of 
                subparagraph (A), the term `excess contribution' means 
                any contribution (other than a rollover contribution 
                from another health savings account, from a health 
                savings security account, or from an Archer MSA, which 
                is not includible in gross income) to the extent such 
                contribution results in the aggregate contributions to 
                health savings accounts of the account beneficiary for 
                the taxable year to be in excess of the limitation 
                under subsection (b) (determined without regard to 
                paragraph (3)(C) thereof) which applies to such 
                beneficiary for such year.
            ``(4) Additional tax on distributions not used for 
        qualified medical expenses.--
                    ``(A) In general.--The tax imposed by this chapter 
                on the account beneficiary for any taxable year in 
                which there is a payment or distribution from a health 
                savings account of such beneficiary which is includible 
                in gross income under paragraph (2) shall be increased 
                by 15 percent of the amount which is so includible.
                    ``(B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment or 
                distribution is made after the account beneficiary 
                becomes disabled within the meaning of section 72(m)(7) 
                or dies.
                    ``(C) Exception for distributions after medicare 
                eligibility.--Subparagraph (A) shall not apply to any 
                payment or distribution after the date on which the 
                account beneficiary attains the age specified in 
                section 1811 of the Social Security Act.
            ``(5) Rollover contribution.--
                    ``(A) In general.--Paragraph (2) shall not apply to 
                any amount paid or distributed from a health savings 
                account to the account beneficiary to the extent the 
                amount received is paid into a health savings account 
                for the benefit of such beneficiary not later than the 
                60th day after the day on which the beneficiary 
                receives the payment or distribution.
                    ``(B) Limitation.--This paragraph shall not apply 
                to any amount described in subparagraph (A) received by 
                an individual from a health savings account if, at any 
                time during the 1-year period ending on the day of such 
                receipt, such individual received any other amount 
                described in subparagraph (A) from a health savings 
                account which was not includible in the individual's 
                gross income because of the application of this 
                paragraph.
            ``(6) Special rules.--Rules similar to the rules of 
        paragraphs (6), (7), and (8) of section 220(f) shall apply for 
        purposes of this section.
    ``(g) Reports.--The Secretary may require the trustee of a health 
savings account to make such reports regarding such account to the 
Secretary and to the account beneficiary with respect to contributions, 
distributions, and such other matters as the Secretary determines 
appropriate. The reports required by this subsection shall be filed at 
such time and in such manner and furnished to such individuals at such 
time and in such manner as may be required by the Secretary.''.
    (b) Deduction Allowed Whether or Not Individual Itemizes Other 
Deductions.--Subsection (a) of section 62 of such Code is amended by 
inserting after paragraph (18) the following new paragraphs:
            ``(19) Health savings security accounts.--The deduction 
        allowed by section 223.
            ``(20) Health savings accounts.--The deduction allowed by 
        section 224.''.
    (c) Coordination With Archer MSAs.--
            (1) Rollovers from archer msas permitted.--Subparagraph (A) 
        of section 220(f)(5) of such Code (relating to rollover 
        contribution) is amended by inserting ``, a health savings 
        security account (as defined in section 223(d)), or a health 
        savings account (as defined in section 224(d)),'' after ``paid 
        into an Archer MSA''.
            (2) Reduction in archer msa limitation for contributions to 
        health savings security accounts and health savings accounts.--
        Subsection (b) of section 220 of such Code (relating to 
        limitations) is amended by adding at the end the following new 
        paragraph:
            ``(8) Coordination with health savings security accounts 
        and health savings accounts.--The limitation which would (but 
        for this paragraph) apply under this subsection to the taxpayer 
        for any taxable year shall be reduced (but not below zero) by 
        the sum of--
                    ``(A) the aggregate amount paid during such taxable 
                year to health savings security accounts of such 
                individual, and
                    ``(B) the aggregate amount paid during such taxable 
                year to health savings accounts of such individual.''.
    (d) Exclusions for Employer Contributions to Health Savings 
Security Accounts and Health Savings Accounts.--
            (1) Exclusion from income tax.--Section 106 of such Code 
        (relating to contributions by employer to accident and health 
        plans) is amended by adding at the end the following new 
        subsections:
    ``(d) Contributions to Health Savings Security Accounts.--
            ``(1) In general.--In the case of an employee who is an 
        eligible individual, amounts contributed by such employee's 
        employer to any health savings security account of such 
        employee shall be treated as employer-provided coverage for 
        medical expenses under an accident or health plan to the extent 
        such amounts do not exceed the limitation under section 223(b) 
        (determined without regard to this subsection) which is 
        applicable to such employee for such taxable year.
            ``(2) Special rules.--Rules similar to the rules of 
        paragraphs (2), (3), (4), and (5) of subsection (b) shall apply 
        for purposes of this subsection.
            ``(3) Definitions.--For purposes of this subsection, the 
        terms `eligible individual' and `health savings security 
        account' have the respective meanings given to such terms by 
        section 223.
            ``(4) Cross reference.--

                                ``For penalty on failure by employer to 
make comparable contributions to the health savings security accounts 
of comparable employees, see section 4980G.
    ``(e) Contributions to Health Savings Accounts.--
            ``(1) In general.--In the case of an employee who is an 
        eligible individual, amounts contributed by such employee's 
        employer to any health savings account of such employee shall 
        be treated as employer-provided coverage for medical expenses 
        under an accident or health plan to the extent such amounts do 
        not exceed the limitation under section 224(b) (determined 
        without regard to this subsection) which is applicable to such 
        employee for such taxable year.
            ``(2) Special rules.--Rules similar to the rules of 
        paragraphs (2), (3), (4), and (5) of subsection (b) shall apply 
        for purposes of this subsection.
            ``(3) Definitions.--For purposes of this subsection, the 
        terms `eligible individual' and `health savings account' have 
        the respective meanings given to such terms by section 224.
            ``(4) Cross reference.--

                                ``For penalty on failure by employer to 
make comparable contributions to the health savings accounts of 
comparable employees, see section 4980G.''.
            (2) Exclusion from employment taxes.--
                    (A) Railroad retirement tax.--Subsection (e) of 
                section 3231 of such Code is amended by adding at the 
                end the following new paragraph:
            ``(11) Health savings security account and health savings 
        account contributions.--The term `compensation' shall not 
        include any payment made to or for the benefit of an employee 
        if at the time of such payment it is reasonable to believe that 
        the employee will be able to exclude such payment from income 
        under subsection (d) or (e) of section 106.''.
                    (B) Unemployment tax.--Subsection (b) of section 
                3306 of such Code is amended by striking ``or'' at the 
                end of paragraph (16), by striking the period at the 
                end of paragraph (17) and inserting ``; or'', and by 
                inserting after paragraph (17) the following new 
                paragraph:
            ``(18) any payment made to or for the benefit of an 
        employee if at the time of such payment it is reasonable to 
        believe that the employee will be able to exclude such payment 
        from income under subsection (d) or (e) of section 106.''.
                    (C) Withholding tax.--Subsection (a) of section 
                3401 of such Code is amended by striking ``or'' at the 
                end of paragraph (20), by striking the period at the 
                end of paragraph (21) and inserting ``; or'', and by 
                inserting after paragraph (21) the following new 
                paragraph:
            ``(22) any payment made to or for the benefit of an 
        employee if at the time of such payment it is reasonable to 
        believe that the employee will be able to exclude such payment 
        from income under subsection (d) or (e) of section 106.''
            (3) Employer contributions required to be shown on w-2.--
        Subsection (a) of section 6051 of such Code is amended by 
        striking ``and'' at the end of paragraph (10), by striking the 
        period at the end of paragraph (11) and inserting a comma, and 
        by inserting after paragraph (11) the following new paragraphs:
            ``(12) the amount contributed to any health savings 
        security account (as defined in section 223(d)) of such 
        employee or such employee's spouse, and
            ``(13) the amount contributed to any health savings account 
        (as defined in section 224(d)) of such employee or such 
        employee's spouse.''.
            (4) Penalty for failure of employer to make comparable 
        health savings account contributions.--
                    (A) In general.--Chapter 43 of such Code is amended 
                by adding after section 4980F the following new 
                section:

``SEC. 4980G. FAILURE OF EMPLOYER TO MAKE COMPARABLE HEALTH SAVINGS 
              ACCOUNT CONTRIBUTIONS.

    ``(a) General Rule.--In the case of an employer who makes a 
contribution to the health savings security account or the health 
savings account of any employee during a calendar year, there is hereby 
imposed a tax on the failure of such employer to meet the requirements 
of subsection (b) for such calendar year.
    ``(b) Rules and Requirements.--Rules and requirements similar to 
the rules and requirements of section 4980E shall apply for purposes of 
this section.
    ``(c) Regulations.--The Secretary shall issue regulations to carry 
out the purposes of this section, including regulations providing 
special rules for employers who make contributions to more than one of 
the following types of accounts during the calendar year:
            ``(1) An Archer MSA.
            ``(2) A health savings security account.
            ``(3) A health savings account.''.
                    (B) Clerical amendment.--The table of sections for 
                chapter 43 of such Code is amended by adding after the 
                item relating to section 4980F the following new item:

``Sec. 4980G. Failure of employer to make comparable health savings 
                            account contributions.''.
    (e) Tax on Excess Contributions.--Section 4973 of such Code 
(relating to tax on excess contributions to certain tax-favored 
accounts and annuities) is amended--
            (1) by striking ``or'' at the end of paragraph (3) of 
        subsection (a),
            (2) by inserting after paragraph (4) of subsection (a) the 
        following new paragraphs:
            ``(5) a health savings security account (within the meaning 
        of section 223(d)), or
            ``(6) a health savings account (within the meaning of 
        section 224(d))'', and
            (4) by adding at the end the following new subsections:
    ``(g) Excess Contributions to Health Savings Security Accounts.--
For purposes of this section, in the case of health savings security 
accounts (within the meaning of section 223(d)), the term `excess 
contributions' means the sum of--
            ``(1) the aggregate amount contributed for the taxable year 
        to the accounts (other than a rollover contribution from 
        another health savings security account, or from an Archer MSA, 
        which is not includible in gross income) which is in excess of 
        the limitation under section 223(b) (determined without regard 
        to paragraph (5)(C) thereof), and
            ``(2) the amount determined under this subsection for the 
        preceding taxable year, reduced by the sum of--
                    ``(A) the distributions out of the accounts which 
                were included in gross income under section 223(f)(2), 
                and
                    ``(B) the excess (if any) of--
                            ``(i) the sum of limitations described in 
                        paragraph (1), over
                            ``(ii) the amount contributed to the 
                        accounts for the taxable year.
For purposes of this subsection, any contribution which is distributed 
out of the health savings security account in a distribution to which 
section 223(f)(3) applies shall be treated as an amount not 
contributed.
    ``(h) Excess Contributions to Health Savings Accounts.--For 
purposes of this section, in the case of health savings accounts 
(within the meaning of section 224(d)), the term `excess contributions' 
means the sum of--
            ``(1) the aggregate amount contributed for the taxable year 
        to the accounts (other than a rollover contribution from 
        another health savings account, a health savings security 
        account, or from an Archer MSA, which is not includible in 
        gross income) which is in excess of the limitation under 
        section 224(b) (determined without regard to paragraph (3)(C) 
        thereof), and
            ``(2) the amount determined under this subsection for the 
        preceding taxable year, reduced by the sum of--
                    ``(A) the distributions out of the accounts which 
                were included in gross income under section 224(f)(2), 
                and
                    ``(B) the excess (if any) of--
                            ``(i) the sum of limitations described in 
                        paragraph (1), over
                            ``(ii) the amount contributed to the 
                        accounts for the taxable year.
For purposes of this subsection, any contribution which is distributed 
out of the health savings account in a distribution to which section 
224(f)(3) applies shall be treated as an amount not contributed.''.
    (f) Tax on Prohibited Transactions.--
            (1) Section 4975 of such Code (relating to tax on 
        prohibited transactions) is amended by adding at the end of 
        subsection (c) the following new paragraphs:
            ``(6) Special rule for health savings security accounts.--
        An individual for whose benefit a health savings security 
        account (within the meaning of section 223(d)) is established 
        shall be exempt from the tax imposed by this section with 
        respect to any transaction concerning such account (which would 
        otherwise be taxable under this section) if, with respect to 
        such transaction, the account ceases to be a health savings 
        security account by reason of the application of section 
        223(e)(2) to such account.
            ``(7) Special rule for health savings accounts.--An 
        individual for whose benefit a health savings account (within 
        the meaning of section 224(d)) is established shall be exempt 
        from the tax imposed by this section with respect to any 
        transaction concerning such account (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the account ceases to be a health savings account 
        by reason of the application of section 224(e)(2) to such 
        account.''.
            (2) Paragraph (1) of section 4975(e) of such Code is 
        amended by redesignating subparagraphs (E) and (F) as 
        subparagraphs (G) and (H), respectively, and by inserting after 
        subparagraph (D) the following new subparagraphs:
                    ``(E) a health savings security account described 
                in section 223(d),
                    ``(F) a health savings account described in section 
                224(d),''.
    (g) Failure To Provide Reports on Health Savings Accounts.--
Paragraph (2) of section 6693(a) of such Code (relating to reports) is 
amended by redesignating subparagraphs (C) and (D) as subparagraphs (E) 
and (F), respectively, and by inserting after subparagraph (B) the 
following new subparagraphs:
                    ``(C) section 223(g) (relating to health savings 
                security accounts),
                    ``(D) section 224(g) (relating to health savings 
                accounts),''.
    (h) Exception From Capitalization of Policy Acquisition Expenses.--
Subparagraph (B) of section 848(e)(1) of such Code (defining specified 
insurance contract) is amended by striking ``and'' at the end of clause 
(iii), by striking the period at the end of clause (iv) and inserting a 
comma, and by adding at the end the following new clauses:
                            ``(v) any contract which is a health 
                        savings security account (as defined in section 
                        223(d)), and''.
                            ``(vi) any contract which is a health 
                        savings account (as defined in section 
                        224(d)).''.
    (i) Health Savings Security Accounts and Health Savings Accounts 
May Be Offered Under Cafeteria Plans.--Paragraph (2) of section 125(d) 
(relating to cafeteria plan defined) is amended by adding at the end 
the following new subparagraph:
                    ``(D) Exception for health savings accounts.--
                Subparagraph (A) shall not apply to a plan to the 
                extent of amounts which a covered employee may elect to 
                have the employer pay as contributions to a health 
                savings security account, or a health savings account, 
                established on behalf of the employee.''.
    (j) Information Reporting by Providers of Health Insurance.--
Subpart B of part III of subchapter A of chapter 61 of such Code is 
amended by adding at the end the following new section:

``SEC. 6050U. RETURNS RELATING TO PROVIDERS OF HEALTH INSURANCE.

    ``(a) Requirement of Reporting.--Under regulations prescribed by 
the Secretary, every person who provides any individual with coverage 
under a plan which constitutes medical care shall, at such time as the 
Secretary may prescribe, make the return described in subsection (b) 
with respect to such individual.
    ``(b) Form and Manner of Returns.--A return is described in this 
subsection if such return--
            ``(1) is in such form as the Secretary may prescribe, and
            ``(2) contains such information as the Secretary 
        prescribes.
    ``(c) Statements To Be Furnished to Individuals With Respect to 
Whom Information Is Required.--Every person required to make a return 
under subsection (a) shall furnish to each individual whose name is 
required to be set forth in such return a written statement showing--
            ``(1) the name and address of the person required to make 
        such return and the phone number of the information contact for 
        such person, and
            ``(2) the information required to be shown on the return 
        with respect to such individual.
The written statement required under the preceding sentence shall be 
furnished on or before January 31 of the year following the calendar 
year for which the return under subsection (a) is required to be 
made.''.
    (k) Conforming Amendments.--
            (1) The table of sections for part VII of subchapter B of 
        chapter 1 of such Code is amended by striking the last item and 
        inserting the following:

``Sec. 223. Health savings security accounts.
``Sec. 224. Health savings accounts.
``Sec. 225. Cross reference.''.

            (2)(A) Sections 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), 
        219(g)(3)(A)(ii), and 221(b)(2)(C)(i) are each amended by 
        inserting ``223,'' after ``222,''.
            (B) Section 222(b)(2)(C)(i) is amended by inserting 
        ``223,'' before ``911''.
            (C) Section 469(i)(3)(F)(iii) is amended by striking ``and 
        222'' and inserting ``222, and 223''.
    (l) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 3. DISPOSITION OF UNUSED HEALTH BENEFITS IN CAFETERIA PLANS AND 
              FLEXIBLE SPENDING ARRANGEMENTS.

    (a) In General.--Section 125 of the Internal Revenue Code of 1986 
(relating to cafeteria plans) is amended by redesignating subsections 
(h) and (i) as subsections (i) and (j), respectively, and by inserting 
after subsection (g) the following:
    ``(h) Contributions of Certain Unused Health Benefits.--
            ``(1) In general.--For purposes of this title, a plan or 
        other arrangement shall not fail to be treated as a cafeteria 
        plan solely because qualified benefits under such plan include 
        a health flexible spending arrangement under which not more 
        than $500 of unused health benefits may be--
                    ``(A) carried forward to the succeeding plan year 
                of such health flexible spending arrangement,
                    ``(B) to the extent permitted by sections 223 and 
                224, contributed on behalf of the employee to a health 
                savings security account (as defined in section 
                223(d)), or a health savings account (as defined in 
                section 224(d)), maintained for the benefit of such 
                employee, or
                    ``(C) contributed to a qualified retirement plan 
                (as defined in section 4974(c)), or an eligible 
                deferred compensation plan (as defined in section 
                457(b)) of an eligible employer described in section 
                457(e)(1)(A), but only to the extent such amount would 
                not be allowed as a deduction under--
                            ``(i) section 223 if made directly by the 
                        employee to a health savings security account 
                        of the employee (determined without regard to 
                        any other contributions made by the employee), 
                        and
                            ``(ii) section 224 if made directly by the 
                        employee to a health savings account of the 
                        employee (determined without regard to any 
                        other contributions made by the employee).
            ``(2) Special rules for treatment of contributions to 
        retirement plans.--For purposes of this title, contributions 
        under paragraph (1)(C)--
                    ``(A) shall be treated as elective deferrals (as 
                defined in section 402(g)(3)) in the case of 
                contributions to a qualified cash or deferred 
                arrangement (as defined in section 401(k)) or to an 
                annuity contract described in section 403(b),
                    ``(B) shall be treated as employer contributions to 
                which the employee has a nonforfeitable right in the 
                case of a plan (other than a plan described in 
                subparagraph (A)) which is described in section 401(a) 
                which includes a trust exempt from tax under section 
                501(a),
                    ``(C) shall be treated as deferred compensation in 
                the case of contributions to an eligible deferred 
                compensation plan (as defined in section 457(b)), and
                    ``(D) shall be treated in the manner designated for 
                purposes of section 408 or 408A in the case of 
                contributions to an individual retirement plan.
            ``(3) Health flexible spending arrangement.--For purposes 
        of this subsection, the term `health flexible spending 
        arrangement' means a flexible spending arrangement (as defined 
        in section 106(c)) that is a qualified benefit and only permits 
        reimbursement for expenses for medical care (as defined in 
        section 213(d)(1) (without regard to subparagraphs (C) and (D) 
        thereof).
            ``(4) Unused health benefits.--For purposes of this 
        subsection, with respect to an employee, the term `unused 
        health benefits' means the excess of--
                    ``(A) the maximum amount of reimbursement allowable 
                to the employee during a plan year under a health 
                flexible spending arrangement, taking into account any 
                election by the employee, over
                    ``(B) the actual amount of reimbursement during 
                such year under such arrangement.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2003.

SEC. 4. EXCEPTION TO INFORMATION REPORTING REQUIREMENTS RELATED TO 
              CERTAIN HEALTH ARRANGEMENTS.

    (a) In General.--Section 6041 (relating to information at source) 
is amended by adding at the end the following new subsection:
    ``(f) Section Does Not Apply to Certain Health Arrangements.--This 
section shall not apply to any payment for medical care (as defined in 
section 213(d)) made under--
            ``(1) a flexible spending arrangement (as defined in 
        section 106(c)(2)), or
            ``(2) a health reimbursement arrangement which is treated 
        as employer-provided coverage under an accident or health plan 
        for purposes of section 106.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2002.
                                 <all>
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