I

103D CONGRESS

2D SESSION H. R. 5106

To amend the Internal Revenue Code of 1986 to provide an exclusion from

gross income for amounts contributed by an employer to medical incentives accounts of employees.

IN THE HOUSE OF REPRESENTATIVES

SEPTEMBER 26, 1994

Mr. SAXTON 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 provide

an exclusion from gross income for amounts contributed

by an employer to medical incentives accounts of employees.

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

3 SECTION. 1. MEDICAL INCENTIVES ACCOUNTS.

4 (a) IN GENERAL.—Part III of subchapter B of chap5 ter 1 of the Internal Revenue Code of 1986 is amended

6 by redesignating section 137 as section 138 and by insert7 ing after section 136 the following new section:
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1 ‘‘SEC. 137. MEDICAL INCENTIVES ACCOUNTS.

2 ‘‘(a) EXCLUSION.—Gross income of an employee

3 shall not include any amount contributed during the tax4 able year by the employer to a medical incentives account

5 of such employee.

6 ‘‘(b) LIMITATIONS.—

7 ‘‘(1) MAXIMUM EXCLUSION.—

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

9 not apply to contributions for the taxable year

10 in excess of $3,000.

11 ‘‘(B) MEDICAL CARE COST ADJUST12 MENT.—

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

14 taxable year beginning in a calendar year

15 after 1994, the dollar amount in subpara16 graph (A) shall be increased for such cal17 endar year by the medical care cost adjust18 ment for such calendar year.

19 ‘‘(ii) MEDICAL CARE COST ADJUST20 MENT.—For purposes of clause (i), the

21 medical care cost adjustment for any cal22 endar year is the percentage (if any) by

23 which—

24 ‘‘(I) the medical care component

25 of the Consumer Price Index (as de-
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1 fined in section 1(f)(5)) for August of

2 the preceding calendar year, exceeds

3 ‘‘(II) such component for August

4 of 1993.

5 If any increase under the preceding sen6 tence is not a multiple of $50, such in7 crease shall be rounded to the nearest mul8 tiple of $50.

9 ‘‘(2) EMPLOYEE MUST HAVE EMPLOYER-PRO10 VIDED HEALTH INSURANCE.—Subsection (a) shall

11 not apply to any employee unless—

12 ‘‘(A) such employee is covered under insur13 ance which constitutes medical care (as defined

14 in section 213(d)), and

15 ‘‘(B) any portion of the cost of such insur16 ance is provided by such employee’s employer.

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

18 ‘‘(1) MEDICAL INCENTIVES ACCOUNT.—The

19 term ‘medical incentives account’ means a trust cre20 ated or organized in the United States exclusively

21 for the purpose of paying (or reimbursing) the medi22 cal expenses of the account beneficiary, the spouse

23 of such beneficiary, or any dependent (as defined in

24 section 152) of such beneficiary, but only if the writ-
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1 ten governing instrument creating the trust meets

2 the following requirements:

3 ‘‘(A) No contribution will be accepted un4 less it is in cash, and contributions will not be

5 accepted for the taxable year in excess of the

6 limitation under subsection (b)(1).

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

8 section 408(n)) or another person who dem9 onstrates to the satisfaction of the Secretary

10 that the manner in which such person will ad11 minister the trust will be consistent with the re12 quirements of this section.

13 ‘‘(C) The interest of an individual in the

14 balance in his account is nonforfeitable.

15 ‘‘(D) No part of the trust assets will be in16 vested in life insurance contracts.

17 ‘‘(E) The assets of the trust will not be

18 commingled with other property except in a

19 common trust fund or common investment

20 fund.

21 ‘‘(2) MEDICAL EXPENSES.—The term ‘medical

22 expenses’ means, with respect to the account bene23 ficiary, the amount paid by such beneficiary during

24 the taxable year which would be allowable as a de-
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1 duction for the taxable year under section 213 but

2 for the threshold based on adjusted gross income.

3 ‘‘(3) ACCOUNT BENEFICIARY.—The term ‘ac4 count beneficiary’ means the employee for whose

5 benefit the medical incentives account is established.

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

7 ‘‘(1) IN GENERAL.—Any amount paid or dis8 tributed out of a medical incentives account shall be

9 included in the gross income of the account bene10 ficiary unless such amount is used exclusively to pay

11 (or reimburse) the medical expenses of such bene12 ficiary, the spouse of such beneficiary, or any de13 pendent (as defined in section 152) of such bene14 ficiary. The preceding sentence shall not apply to the

15 extent that the aggregate of such payments and dis16 tributions during any taxable year which are not so

17 used does not exceed the account balance as of the

18 close of the preceding taxable year.

19 ‘‘(2) PENALTY FOR AMOUNTS INCLUDED IN IN20 COME.—If any amount is includible in the gross in21 come of the account beneficiary for any taxable year,

22 such beneficiary’s tax imposed by this chapter shall

23 be increased by 10 percent of the amount so includ24 ible.

25 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—
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1 ‘‘(1) EXEMPTION FROM TAX.—Any medical in2 centives account is exempt from taxation under this

3 subtitle unless such account has ceased to be a med4 ical incentives account by reason of paragraph (2) or

5 (3). Notwithstanding the preceding sentence, any

6 such account shall be subject to the taxes imposed

7 by section 511 (relating to imposition of tax on un8 related business income of charitable, etc. organiza9 tions).

10 ‘‘(2) ACCOUNT TERMINATES IF INDIVIDUAL EN11 GAGES IN PROHIBITED TRANSACTION.—

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

13 year of the individual for whose benefit the

14 medical incentives account was established,

15 such individual engages in any transaction pro16 hibited by section 4975 with respect to the ac17 count, the account ceases to be a medical incen18 tives account as of the first day of that taxable

19 year.

20 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

21 ALL ITS ASSETS.—In any case in which any ac22 count ceases to be a medical incentives account

23 by reason of subparagraph (A) on the first day

24 of any taxable year, paragraph (1) of subsection

25 (d) shall be applied as if there were a distribu-
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1 tion on such first day in an amount equal to

2 the fair market value (on such first day) of all

3 assets in the account (on such first day) and no

4 portion of such distribution were used to pay

5 medical expenses.

6 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU7 RITY.—If, during any taxable year, the individual for

8 whose benefit a medical incentives account was es9 tablished uses the account or any portion thereof as

10 security for a loan, the portion so used is treated as

11 distributed to that individual and not used to pay

12 medical expenses.

13 ‘‘(f) CUSTODIAL ACCOUNTS.—For purposes of this

14 section, a custodial account shall be treated as a trust if—

15 ‘‘(1) the assets of such account are held by a

16 bank (as defined in section 408(n)) or another per17 son who demonstrates to the satisfaction of the Sec18 retary that the manner in which he will administer

19 the account will be consistent with the requirements

20 of this section, and

21 ‘‘(2) the custodial account would, except for the

22 fact that it is not a trust, constitute a medical incen23 tives account described in subsection (c).

24 For purposes of this title, in the case of a custodial ac25 count treated as a trust by reason of the preceding sen-
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1 tence, the custodian of such account shall be treated as

2 the trustee thereof.

3 ‘‘(g) REPORTS.—The trustee of a medical incentives

4 account shall make such reports regarding such account

5 to the Secretary and to the individual for whose benefit

6 the account is maintained with respect to contributions,

7 distributions, and such other matters as the Secretary

8 may require under regulations. The reports required by

9 this subsection shall be filed at such time and in such

10 manner and furnished to such individuals at such time and

11 in such manner as may be required by those regulations.’’

12 (b) EXCLUSION APPLIES FOR EMPLOYMENT TAX

13 PURPOSES.—

14 (1) SOCIAL SECURITY TAXES.—

15 (A) Paragraph (20) of section 3121(a) of

16 such Code is amended by striking ‘‘or 132’’ and

17 inserting ‘‘132, or 137’’.

18 (B) Paragraph (17) of section 209(a) of

19 the Social Security Act is amended by striking

20 ‘‘or 132’’ and inserting ‘‘132, or 137’’.

21 (2) RAILROAD RETIREMENT TAX.—Paragraph

22 (5) of section 3231(e) of such Code is amended by

23 striking ‘‘or 132’’ and inserting ‘‘132, or 137’’.
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1 (3) UNEMPLOYMENT TAX.—Paragraph (16) of

2 section 3306(b) of such Code is amended by striking

3 ‘‘or 132’’ and inserting ‘‘132, or 137’’.

4 (4) WITHHOLDING TAX.—Paragraph (19) of

5 section 3401(a) of such Code is amended by striking

6 ‘‘or 132’’ and inserting ‘‘, 132, or 137’’.

7 (c) TAX ON PROHIBITED TRANSACTIONS.—Section

8 4975 of such Code (relating to prohibited transactions)

9 is amended—

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

11 following new paragraph:

12 ‘‘(4) SPECIAL RULE FOR MEDICAL INCENTIVES

13 ACCOUNTS.—An individual for whose benefit a medi14 cal incentives account (within the meaning of section

15 137(c)) is established shall be exempt from the tax

16 imposed by this section with respect to any trans17 action concerning such account (which would other18 wise be taxable under this section) if, with respect

19 to such transaction, the account ceases to be a medi20 cal incentives account by reason of the application of

21 section 137(e)(2)(A) to such account.’’, and

22 (2) by inserting ‘‘or a medical incentives ac23 count described in section 137(c)’’ in subsection

24 (e)(1) after ‘‘described in section 408(a)’’.
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1 (d) FAILURE TO PROVIDE REPORTS ON MEDICAL IN2 CENTIVES ACCOUNTS.—Section 6693 of such Code (relat3 ing to failure to provide reports on individual retirement

4 account or annuities) is amended—

5 (1) by inserting ‘‘OR ON MEDICAL INCEN6 TIVES ACCOUNTS’’ after ‘‘ANNUITIES’’ in the

7 heading of such section, and

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

9 following: ‘‘The person required by section 137(g) to

10 file a report regarding a medical incentives account

11 at the time and in the manner required by such sec12 tion shall pay a penalty of $50 for each failure un13 less it is shown that such failure is due to reasonable

14 cause.’’

15 (e) CLERICAL AMENDMENTS.—

16 (1) The table of sections for part III of sub17 chapter B of chapter 1 of such Code is amended by

18 striking the last item and inserting the following:

‘‘Sec. 137. Medical incentives accounts.

‘‘Sec. 138. Cross references to other Acts.’’

19 (2) The table of sections for subchapter B of

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

21 on medical incentives accounts’’ after ‘‘annuities’’ in

22 the item relating to section 6693.

23 (f) EFFECTIVE DATE.—The amendments made by

24 this section shall apply to taxable years beginning after
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1 the close of the calendar year which includes the date of

2 the enactment of this Act.

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