I

104TH CONGRESS

1ST SESSION H. R. 1818

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

contributions to a medical savings account by any individual who is

covered under a catastrophic coverage health plan.

IN THE HOUSE OF REPRESENTATIVES

JUNE 13, 1995

Mr. ARCHER (for himself, Mr. JACOBS, Mr. THOMAS, Mr. DELAY, Mr.

CRANE, Mr. SHAW, Mr. BUNNING of Kentucky, Mr. HOUGHTON, Mr.

HERGER, Mr. MCCRERY, Mr. HANCOCK, Mr. CAMP, Mr. RAMSTAD, Mr.

ZIMMER, Mr. NUSSLE, Mr. SAM JOHNSON of Texas, Ms. DUNN of Washington, Mr. COLLINS of Georgia, Mr. PORTMAN, Mr. ENGLISH of Pennsylvania, Mr. ENSIGN, Mr. CHRISTENSEN, Mr. SOLOMON, Mr. YOUNG of

Alaska, Mr. MYERS of Indiana, Mr. DORNAN, Mr. SMITH of Texas, Mr.

ROHRABACHER, Mr. FROST, Mr. HALL of Texas, Mr. BURTON of Indiana, Mr. LIPINSKI, Mr. TORRICELLI, Mrs. VUCANOVICH, Mr. SAXTON,

Mr. CALLAHAN, Mr. GALLEGLY, Mr. PICKETT, Mr. UPTON, Mr.

POSHARD, Mr. STEARNS, Mr. BARTLETT of Maryland, Mr. BREWSTER,

Mr. CRAPO, Mr. HILLEARY, Mr. INGLIS of South Carolina, Mr.

KNOLLENBERG, Mr. MANZULLO, Mr. ROYCE, Mr. TALENT, Mr.

CHAMBLISS, Mr. CHRYSLER, Mr. GANSKE, Mr. JONES, Mr. LARGENT,

Mr. THORNBERRY, Mr. WATTS of Oklahoma, Mr. WELLER, Mr. WHITE,

Mr. WICKER, Mr. HOKE, and Mrs. JOHNSON of Connecticut) 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

by any individual who is covered under a catastrophic

coverage health plan.
2

•HR 1818 IH

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 ‘‘Family Medical Sav5 ings and Investment Act of 1995’’.

6 SEC. 2. MEDICAL SAVINGS ACCOUNTS.

7 (a) IN GENERAL.—Part VII of subchapter B of chap8 ter 1 of the Internal Revenue Code of 1986 (relating to

9 additional itemized deductions for individuals) is amended

10 by redesignating section 220 as section 221 and by insert11 ing after section 219 the following new section:

12 ‘‘SEC. 220. MEDICAL SAVINGS ACCOUNTS.

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

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

16 the taxable year an amount equal to the aggregate amount

17 paid in cash during such taxable year by such individual

18 to a medical savings account of such individual.

19 ‘‘(b) LIMITATIONS.—

20 ‘‘(1) IN GENERAL.—Except as otherwise pro21 vided in this subsection, the amount allowable as a

22 deduction under subsection (a) to an individual for

23 the taxable year shall not exceed the lesser of—

24 ‘‘(A) $2,500, or
3

•HR 1818 IH

1 ‘‘(B) the deductible under the catastrophic

2 health plan covering such individual.

3 If the catastrophic health plan covering such individ4 ual provides coverage for any other eligible individ5 ual who is the spouse or any dependent (as defined

6 in section 152) of the taxpayer, subparagraph (A)

7 shall be applied by substituting ‘$5,000’ for

8 ‘$2,500’.

9 ‘‘(2) PRORATION OF LIMITATION.—

10 ‘‘(A) IN GENERAL.—The limitation under

11 paragraph (1) shall be the sum of the monthly

12 limitations for months during the taxable year

13 that the individual is an eligible individual if—

14 ‘‘(i) such individual is not an eligible

15 individual for all months of the taxable

16 year,

17 ‘‘(ii) the deductible under the cata18 strophic health plan covering such individ19 ual is not the same throughout such tax20 able year, or

21 ‘‘(iii) such limitation is determined

22 using the last sentence of paragraph (1)

23 for some but not all months during such

24 taxable year.
4

•HR 1818 IH

1 ‘‘(B) MONTHLY LIMITATION.—The month2 ly limitation for any month shall be an amount

equal to 1 3 ⁄12 of the limitation which would (but

4 for this paragraph and paragraph (3)) be deter5 mined under paragraph (1) if the facts and cir6 cumstances as of the first day of such month

7 that such individual is covered under a cata8 strophic health plan were true for the entire

9 taxable year.

10 ‘‘(3) COORDINATION WITH EXCLUSION FOR EM11 PLOYER CONTRIBUTIONS, INCLUDING TRANSFERS

12 FROM FLEXIBLE SPENDING ARRANGEMENTS.—No

13 deduction shall be allowed under this section for any

14 amount paid for any taxable year to a medical sav15 ings account of an individual if—

16 ‘‘(A) any amount is paid to any medical

17 savings account of such individual which is ex18 cludable from gross income under section

19 106(b) for such year, or

20 ‘‘(B) in a case described in paragraph

21 (4)(B), any amount is paid to any medical sav22 ings account of either spouse which is so ex23 cludable for such year.

24 ‘‘(4) SPECIAL RULE FOR MARRIED INDIVID25 UALS.—
5

•HR 1818 IH

1 ‘‘(A) IN GENERAL.—This subsection shall

2 be applied separately for each married individ3 ual and without regard to any community prop4 erty laws.

5 ‘‘(B) SPECIAL RULE.—If individuals who

6 are married to each other are covered under the

7 same catastrophic health plan, then the

8 amounts applicable under subparagraphs (A)

9 and (B) of paragraph (1) shall be divided equal10 ly between them unless they agree on a dif11 ferent division.

12 ‘‘(5) DENIAL OF DEDUCTION TO DEPEND13 ENTS.—No deduction shall be allowed under this

14 section to any individual with respect to whom a de15 duction under section 151 is allowable to another

16 taxpayer for a taxable year beginning in the cal17 endar year in which such individual’s taxable year

18 begins.

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

20 ‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible

21 individual’ means, with respect to any month, any

22 individual—

23 ‘‘(A) who is covered under a catastrophic

24 health plan at any time during such month, and
6

•HR 1818 IH

1 ‘‘(B) who is not, while covered under a cat2 astrophic health plan, covered under any health

3 plan—

4 ‘‘(i) which is not a catastrophic health

5 plan, and

6 ‘‘(ii) which provides coverage (other

7 than permitted coverage) for any services

8 which are covered under the catastrophic

9 health plan.

10 ‘‘(2) CATASTROPHIC HEALTH PLAN.—The term

11 ‘catastrophic health plan’ means any health plan

12 which provides no compensation for an individual’s

13 expenses covered by the plan (other than for per14 mitted coverage) for any calendar year to the extent

15 such expenses for such calendar year do not exceed

16 $1,800 ($3,600 if the catastrophic health plan cover17 ing the taxpayer provides coverage for more than 1

18 individual) or such higher amounts as may be speci19 fied by the plan.

20 ‘‘(3) PERMITTED COVERAGE.—The term ‘per21 mitted coverage’ means—

22 ‘‘(A) coverage only for accidents, dental

23 care, vision care, disability income, or long-term

24 care insurance,
7

•HR 1818 IH

1 ‘‘(B) Medicare supplemental health insur2 ance,

3 ‘‘(C) coverage issued as a supplement to li4 ability insurance,

5 ‘‘(D) liability insurance, including general

6 liability insurance and automobile liability in7 surance,

8 ‘‘(E) worker’s compensation or similar in9 surance,

10 ‘‘(F) automobile medical-payment insur11 ance,

12 ‘‘(G) coverage for a specified disease or ill13 ness, and

14 ‘‘(H) a hospital or fixed indemnity policy.

15 ‘‘(d) MEDICAL SAVINGS ACCOUNT.—For purposes of

16 this section—

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

18 ‘medical savings account’ means a trust created or

19 organized in the United States exclusively for the

20 purpose of paying the qualified medical expenses of

21 the account holder, but only if the written governing

22 instrument creating the trust meets the following re23 quirements:
8

•HR 1818 IH

1 ‘‘(A) Except in the case of a rollover con2 tribution described in subsection (f)(3), no con3 tribution will be accepted unless it is in cash.

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

5 section 408(n)), an insurance (as defined in

6 section 816), or another person who dem7 onstrates to the satisfaction of the Secretary

8 that the manner in which such person will ad9 minister the trust will be consistent with the re10 quirements of this section.

11 ‘‘(C) No part of the trust assets will be in12 vested in life insurance contracts.

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

14 commingled with other property except in a

15 common trust fund or common investment

16 fund.

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

18 balance in his account is nonforfeitable.

19 ‘‘(2) QUALIFIED MEDICAL EXPENSES.—

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

21 medical expenses’ means, with respect to an ac22 count holder, amounts paid by such holder—

23 ‘‘(i) for medical care (as defined in

24 section 213(d)) for such individual, the

25 spouse of such individual, and any depend-
9

•HR 1818 IH

1 ent (as defined in section 152) of such in2 dividual, but only to the extent such

3 amounts are not compensated for by insur4 ance or otherwise, or

5 ‘‘(ii) for long-term care insurance for

6 such individual, spouse, or dependent.

7 ‘‘(B) HEALTH PLAN COVERAGE MAY NOT

8 BE PURCHASED FROM ACCOUNT.—

9 ‘‘(i) IN GENERAL.—Such term shall

10 not include any amount paid for coverage

11 under a health plan unless such plan is a

12 catastrophic health plan.

13 ‘‘(ii) EXCEPTION.—Clause (i) shall

14 not apply to any amount paid for long15 term care insurance.

16 ‘‘(3) ACCOUNT HOLDER.—The term ‘account

17 holder’ means the individual on whose behalf the

18 medical savings account was established.

19 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar

20 to the following rules shall apply for purposes of this

21 section:

22 ‘‘(A) Section 219(d)(2) (relating to no de23 duction for rollovers).

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

25 when contributions deemed made).
10

•HR 1818 IH

1 ‘‘(C) Except as provided in section 106(b),

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

4 ‘‘(D) Section 408(h) (relating to custodial

5 accounts).

6 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—

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

8 ‘‘(A) IN GENERAL.—Except as provided in

9 subparagraph (B), the account holder of a med10 ical savings account shall be treated for pur11 poses of this title as the owner of such account

12 and shall be subject to tax thereon in accord13 ance with subpart E of part I of subchapter J

14 of this chapter (relating to grantors and others

15 treated as substantial owners).

16 ‘‘(B) TREATMENT OF CAPITAL LOSSES.—

17 With respect to assets held in a medical savings

18 account, any capital loss for a taxable year

19 from the sale or exchange of such an asset shall

20 be allowed only to the extent of capital gains

21 from such assets for such taxable year. Any

22 capital loss which is disallowed under the pre23 ceding sentence shall be treated as a capital

24 loss from the sale or exchange of such an asset

25 in the next taxable year. For purposes of this
11

•HR 1818 IH

1 subparagraph, all medical savings accounts of

2 the account holder shall be treated as 1 ac3 count.

4 ‘‘(2) ACCOUNT ASSETS TREATED AS DISTRIB5 UTED IN THE CASE OF PROHIBITED TRANSACTIONS

6 OR ACCOUNT PLEDGED AS SECURITY FOR LOAN.—

7 Rules similar to the rules of paragraphs (2) and (4)

8 of section 408(e) shall apply to medical savings ac9 counts, and any amount treated as distributed under

10 such rules shall be treated as not used to pay quali11 fied medical expenses.

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

13 ‘‘(1) INCLUSION OF AMOUNTS NOT USED FOR

14 QUALIFIED MEDICAL EXPENSES.—

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

16 distributed out of a medical savings account

17 which is not used exclusively to pay the quali18 fied medical expenses of the account holder

19 shall be included in the gross income of such

20 holder to the extent such amount does not ex21 ceed the excess of—

22 ‘‘(i) the aggregate contributions to

23 such account which were allowed as a de24 duction under this section or which were

25 excluded under section 106(b), over
12

•HR 1818 IH

1 ‘‘(ii) the aggregate prior payments or

2 distributions from such account which were

3 includible in gross income under this para4 graph.

5 ‘‘(B) SPECIAL RULES.—For purposes of

6 subparagraph (A)—

7 ‘‘(i) all medical savings accounts of

8 the account holder shall be treated as 1 ac9 count,

10 ‘‘(ii) all payments and distributions

11 during any taxable year shall be treated as

12 1 distribution, and

13 ‘‘(iii) any distribution of property

14 shall be taken into account at its fair mar15 ket value on the date of the distribution.

16 ‘‘(2) PENALTY FOR DISTRIBUTIONS NOT USED

17 FOR QUALIFIED MEDICAL EXPENSES.—

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

19 this chapter for any taxable year in which there

20 is a payment or distribution from a medical

21 savings account which is not used exclusively to

22 pay the qualified medical expenses of the ac23 count holder shall be increased by 10 percent of

24 the amount of such payment or distribution
13

•HR 1818 IH

1 which is includible in gross income under para2 graph (1).

3 ‘‘(B) DISABILITY OR DEATH CASES.—Sub4 paragraph (A) shall not apply if the payment or

5 distribution is made after the account holder

6 becomes disabled within the meaning of section

7 72(m)(7) or dies.

8 ‘‘(3) ROLLOVERS.—Paragraph (1) shall not

9 apply to any amount paid or distributed out of a

10 medical savings account to the account holder if the

11 entire amount received (including money and any

12 other property) is paid into another medical savings

13 account for the benefit of such holder not later than

14 the 60th day after the day on which he received the

15 payment or distribution.

16 ‘‘(4) COORDINATION WITH MEDICAL EXPENSE

17 DEDUCTION.—For purposes of section 213, any pay18 ment or distribution out of a medical savings ac19 count for qualified medical expenses shall not be

20 treated as an expense paid for medical care to the

21 extent of the amount of such payment or distribu22 tion which is excludable from gross income solely by

23 reason of paragraph (1)(A).

24 ‘‘(g) COST-OF-LIVING ADJUSTMENT.—
14

•HR 1818 IH

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

2 year beginning in a calendar year after 1996, each

3 dollar amount in subsection (b)(1) or in subsection

4 (c)(2) shall be increased by an amount equal to—

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

6 ‘‘(B) the medical care cost adjustment for

7 such calendar year.

8 If any increase under the preceding sentence is not

9 a multiple of $50, such increase shall be rounded to

10 the nearest multiple of $50.

11 ‘‘(2) MEDICAL CARE COST ADJUSTMENT.—For

12 purposes of paragraph (1), the medical care cost ad13 justment for any calendar year is the percentage (if

14 any) by which—

15 ‘‘(A) the medical care component of the

16 Consumer Price Index (as defined in section

17 1(f)(5)) for August of the preceding calendar

18 year, exceeds

19 ‘‘(B) such component for August of 1995.

20 ‘‘(h) REPORTS.—The trustee of a medical savings ac21 count shall make such reports regarding such account to

22 the Secretary and to the account holder with respect to

23 contributions, distributions, and such other matters as the

24 Secretary may require under regulations. The reports re25 quired by this subsection shall be filed at such time and
15

•HR 1818 IH

1 in such manner and furnished to such individuals at such

2 time and in such manner as may be required by those reg3 ulations.’’

4 (b) DEDUCTION ALLOWED WHETHER OR NOT INDI5 VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a)

6 of section 62 of such Code is amended by inserting after

7 paragraph (15) the following new paragraph:

8 ‘‘(16) MEDICAL SAVINGS ACCOUNTS.—The de9 duction allowed by section 220.’’

10 (c) EXCLUSIONS FOR EMPLOYER CONTRIBUTIONS TO

11 MEDICAL SAVINGS ACCOUNTS.—

12 (1) EXCLUSION FROM INCOME TAX.—The text

13 of section 106 of such Code (relating to contribu14 tions by employer to accident and health plans) is

15 amended to read as follows:

16 ‘‘(a) GENERAL RULE.—Gross income of an employee

17 does not include employer-provided coverage under an ac18 cident or health plan.

19 ‘‘(b) CONTRIBUTIONS TO MEDICAL SAVINGS AC20 COUNTS.—

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

22 who is an eligible individual, gross income does not

23 include amounts contributed by such employee’s em24 ployer to any medical savings account of such em25 ployee. For purposes of the preceding sentence, the
16

•HR 1818 IH

1 terms ‘eligible individual’ and ‘medical savings ac2 count’ have the respective meanings given to such

3 terms by section 220.

4 ‘‘(2) NO CONSTRUCTIVE RECEIPT.—No amount

5 shall be included in the gross income of any em6 ployee solely because the employee may choose be7 tween the contributions referred to in paragraph (1)

8 and employer contributions to another health plan of

9 the employer.

10 ‘‘(3) TRANSFERS FROM FLEXIBLE SPENDING

11 ARRANGEMENTS.—

12 ‘‘(A) IN GENERAL.—A flexible spending ar13 rangement for health shall not cease to be

14 treated as such an arrangement, and no

15 amount shall be includible in the gross income

16 of the employee, solely because amounts not

17 paid out as reimbursements under such ar18 rangement are contributed to a medical savings

19 account of such employee.

20 ‘‘(B) FLEXIBLE SPENDING ARRANGE21 MENT.—For purposes of this paragraph, a

22 flexible spending arrangement is a benefit pro23 gram which provides employees with coverage

24 under which—
17

•HR 1818 IH

1 ‘‘(i) specified incurred expenses may

2 be reimbursed (subject to reimbursement

3 maximums and other reasonable condi4 tions), and

5 ‘‘(ii) the maximum amount of reim6 bursement which is reasonably available to

7 a participant for such coverage is less than

8 500 percent of the cost of such coverage.

9 In the case of an insured plan, the maximum

10 amount reasonably available shall be deter11 mined on the basis of the underlying coverage.

12 ‘‘(4) COORDINATION WITH DEDUCTION LIMITA13 TION.—The amount excluded from the gross income

14 of an employee under this subsection for any taxable

15 year shall not exceed the limitation under section

16 220(b)(1) (determined without regard to this sub17 section) which is applicable to such employee for

18 such taxable year.’’

19 (2) EXCLUSION FROM EMPLOYMENT TAXES.—

20 (A) SOCIAL SECURITY TAXES.—

21 (i) Subsection (a) of section 3121 of

22 such Code is amended by striking ‘‘or’’ at

23 the end of paragraph (20), by striking the

24 period at the end of paragraph (21) and

25 inserting ‘‘; or’’, and by inserting after
18

•HR 1818 IH

1 paragraph (21) the following new para2 graph:

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

4 of an employee if at the time of such payment it is

5 reasonable to believe that the employee will be able

6 to exclude such payment from income under section

7 106(b).’’

8 (ii) Subsection (a) of section 209 of

9 the Social Security Act is amended by

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

11 by striking the period at the end of para12 graph (18) and inserting ‘‘; or’’, and by in13 serting after paragraph (18) the following

14 new paragraph:

15 ‘‘(19) any payment made to or for the benefit

16 of an employee if at the time of such payment it is

17 reasonable to believe that the employee will be able

18 to exclude such payment from income under section

19 106(b) of the Internal Revenue Code of 1986.’’

20 (B) RAILROAD RETIREMENT TAX.—Sub21 section (e) of section 3231 of such Code is

22 amended by adding at the end the following

23 new paragraph:

24 ‘‘(10) MEDICAL SAVINGS ACCOUNT CONTRIBU25 TIONS.—The term ‘compensation’ shall not include
19

•HR 1818 IH

1 any payment made to or for the benefit of an em2 ployee if at the time of such payment it is reason3 able to believe that the employee will be able to ex4 clude such payment from income under section

5 106(b).’’

6 (C) UNEMPLOYMENT TAX.—Subsection (b)

7 of section 3306 of such Code is amended by

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

9 striking the period at the end of paragraph (16)

10 and inserting ‘‘; or’’, and by inserting after

11 paragraph (16) the following new paragraph:

12 ‘‘(17) any payment made to or for the benefit

13 of an employee if at the time of such payment it is

14 reasonable to believe that the employee will be able

15 to exclude such payment from income under section

16 106(b).’’

17 (D) WITHHOLDING TAX.—Subsection (a)

18 of section 3401 of such Code is amended by

19 striking ‘‘or’’ at the end of paragraph (19), by

20 striking the period at the end of paragraph (20)

21 and inserting ‘‘; or’’, and by inserting after

22 paragraph (20) the following new paragraph:

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

24 of an employee if at the time of such payment it is

25 reasonable to believe that the employee will be able
20

•HR 1818 IH

1 to exclude such payment from income under section

2 106(b).’’

3 (d) TAX ON PROHIBITED TRANSACTIONS.—Section

4 4975 of such Code (relating to tax on prohibited trans5 actions) is amended—

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

7 following new paragraph:

8 ‘‘(4) SPECIAL RULE FOR MEDICAL SAVINGS AC9 COUNTS.—An individual for whose benefit a medical

10 savings account (within the meaning of section

11 220(d)) is established shall be exempt from the tax

12 imposed by this section with respect to any trans13 action concerning such account (which would other14 wise be taxable under this section) if, with respect

15 to such transaction, the account ceases to be a medi16 cal savings account by reason of the application of

17 section 220(e)(2) to such account.’’, and

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

19 described in section 220(d)’’ in subsection (e)(1)

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

21 (e) FAILURE TO PROVIDE REPORTS ON MEDICAL

22 SAVINGS ACCOUNTS.—Section 6693 of such Code (relat23 ing to failure to provide reports on individual retirement

24 accounts or annuities) is amended—
21

•HR 1818 IH

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

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

3 such section, and

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

5 following: ‘‘The person required by section 220(h) to

6 file a report regarding a medical savings account at

7 the time and in the manner required by such section

8 shall pay a penalty of $50 for each failure to so file

9 unless it is shown that such failure is due to reason10 able cause.’’

11 (f) CLERICAL AMENDMENTS.—

12 (1) The table of sections for part VII of sub13 chapter B of chapter 1 of such Code is amended by

14 striking the last item and inserting the following:

‘‘Sec. 220. Medical savings accounts.

‘‘Sec. 221. Cross reference.’’

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

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

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

18 the item relating to section 6693.

19 (g) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to taxable years beginning after

21 December 31, 1995.

Æ

HR 1818 IH——2