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[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[S. 1105 Introduced in Senate (IS)]

103d CONGRESS
  1st Session
                                S. 1105

     To amend the Internal Revenue Code of 1986 to provide for the 
 establishment of individual medical savings accounts to assist in the 
  payment of medical and long-term care expenses, to provide that the 
 earnings on such accounts will not be taxable, to allow rollovers of 
   such accounts into individual retirement accounts, and for other 
                               purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                             June 15, 1993

   Mr. Coats (for himself, Mr. Lugar, and Mr. Gramm) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL

 
     To amend the Internal Revenue Code of 1986 to provide for the 
 establishment of individual medical savings accounts to assist in the 
  payment of medical and long-term care expenses, to provide that the 
 earnings on such accounts will not be taxable, to allow rollovers of 
   such accounts into individual retirement accounts, 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. INDIVIDUAL MEDICAL SAVINGS ACCOUNTS.

    (a) In General.--Subchapter F of chapter 1 of the Internal Revenue 
Code of 1986 (relating to exempt organizations) is amended by adding at 
the end thereof the following new part:

            ``PART VIII--INDIVIDUAL MEDICAL SAVINGS ACCOUNTS

``Sec. 529. Taxation of individual medical savings accounts.

``SEC. 529. TAXATION OF INDIVIDUAL MEDICAL SAVINGS ACCOUNTS.

    ``(a) Exemption From Taxation.--
            ``(1) In general.--Except as provided in paragraph (2), an 
        individual medical savings account is exempt from taxation 
        under this subtitle.
            ``(2) Unrelated business income.--An individual medical 
        savings account shall be subject to the tax imposed by section 
        511 (relating to imposition of tax on unrelated business income 
        of charitable, etc. organizations).
    ``(b) Definition of Individual Medical Savings Account.--
            ``(1) In general.--For purposes of this section, the term 
        `individual medical savings account' means a trust created or 
        organized in the United States exclusively for the purpose of 
        making qualified distributions to, or for the benefit of, an 
        individual, but only if the written governing instrument 
        creating the trust meets the following requirements:
                    ``(A) No contribution will be accepted unless--
                            ``(i) the employer of such individual 
                        provides written confirmation that such 
                        employer is maintaining a catastrophic health 
                        care insurance plan for such individual,
                            ``(ii) upon the election of such individual 
                        to enroll in such plan, such contribution from 
                        such employer is equal to the qualified premium 
                        differential amount relating to such plan,
                            ``(iii) except in the case of contributions 
                        from another individual medical savings account 
                        or qualified surrender amounts, the total 
                        amount of contributions for the taxable year 
                        from all individuals specified in subparagraph 
                        (F) is not greater than an amount equal to the 
                        sum of--
                                    ``(I) $3,000, plus
                                    ``(II) $600 for each dependent (as 
                                defined in section 152) of the 
                                individual, and
                            ``(iv) such contribution is in cash, 
                        stocks, bonds, or other securities which are 
                        readily tradable on an established securities 
                        market.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                that 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 account may only be 
                invested in accordance with the direction of--
                            ``(i) the individual for whose benefit the 
                        account is established (or the legal 
                        representative of such individual), and
                            ``(ii) all individuals contributing to the 
                        account.
                    ``(E) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(F) Contributions may be made to the account only 
                by the individual for whose benefit the account is 
                established, the individual's spouse, the individual's 
                parents or children, and the individual's employer 
                (under rules similar to the requirements described in 
                paragraphs (2), (3), and (5) of section 408(k)).
                    ``(G) The account may not be established for the 
                benefit of more than 1 individual (other than the 
                spouse and dependents of such individual).
                    ``(H) The beneficiary of the account may not be the 
                beneficiary of any other individual medical savings 
                account (other than as a spouse or dependent of the 
                beneficiary of such other account).
            ``(2) Stock, etc., to be valued as of transfer date.--The 
        fair market value of stocks, bonds, and other securities shall 
        be determined as of the date on which transferred to the 
        account. If the date of transfer falls on a Saturday, Sunday, 
        or public legal holiday, then the fair market value shall be 
        determined by reference to the last preceding trading day on 
        which such stocks, bonds, or securities could have been traded 
        on an established securities market.
            ``(3) Catastrophic health care insurance plan.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the term `catastrophic health care insurance plan' 
                means a group health plan which provides, for a higher 
                deductible (not less than $2,000), similar benefits 
                to--
                            ``(i) other group health plans offered by 
                        the employer,
                            ``(ii) other group health plans previously 
                        offered by the employer, in the case in which a 
                        single group health plan is offered by the 
                        employer, or
                            ``(iii) other group health plans for 
                        similar employees in the same geographic area, 
                        in the case in which the employer has not 
                        previously offered any group health plan.
                    ``(B) Group health plan.--For purposes of 
                subparagraph (A), the term `group health plan' has the 
                meaning given such term by section 5000(b)(1).
            ``(4) Qualified premium differential amount.--For purposes 
        of paragraph (1), the qualified premium differential amount for 
        an employee is equal to--
                    ``(A) the premium differential amount realized by 
                the employer in the plan year in which the employee 
                elects coverage under a catastrophic health care 
                insurance plan, and
                    ``(B) for each subsequent plan year during which 
                such election remains in effect, the amount determined 
                under subparagraph (A) 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 the plan year begins, by 
                        substituting `the calendar year preceding the 
                        calendar year in which the plan year described 
                        in section 529(b)(4)(A) began' for `calendar 
                        year 1989'.
            ``(5) Determination of premium differential.--For purposes 
        of this subsection, in making a determination of a premium 
        differential for any year, the employer shall use only actual 
        premiums charged to such employer, or, in the case of group 
        health plans described in clauses (ii) and (iii) of paragraph 
        (3)(A), bona fide premium quotes for such year.
            ``(6) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 1994, each dollar 
        amount contained in paragraph (1)(A)(iii) shall be increased by 
        an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                1993' for `calendar year 1989' in subparagraph (B) 
                thereof.
        If any increase determined under the preceding sentence is not 
        a multiple of $10, such increase shall be rounded to the 
        nearest multiple of $10 (or if such increase is a multiple of 
        $5, such increase shall be rounded to the next highest multiple 
        of $10).
    ``(c) Other Definitions.--For purposes of this section--
            ``(1) Qualified distributions.--The term `qualified 
        distributions' means any--
                    ``(A) qualified medical expense distribution, and
                    ``(B) qualified long-term care expense 
                distribution.
            ``(2) Qualified medical expense distribution.--The term 
        `qualified medical expense distribution' means any distribution 
        made to the individual (other than distributions described in 
        paragraph (3)) to the extent such distribution does not exceed 
        the amount allowable as a deduction under section 213 to the 
        individual for amounts paid during the taxable year for medical 
        care (determined without regard to whether the individual 
        itemizes deductions for such taxable year).
            ``(3) Qualified long-term care expense distribution.--
                    ``(A) In general.--The term `qualified long-term 
                care expense distribution' means any distribution made 
                to the individual (other than distributions described 
                in paragraph (2)) to the extent such distribution does 
                not exceed the amount of qualified long-term care 
                expenses of the individual, or the spouse or child (as 
                defined in section 151(c)(3)) of such individual, for 
                the taxable year.
                    ``(B) Qualified long-term care expenses.--For 
                purposes of subparagraph (A), the term `qualified long-
                term care expenses' means amounts paid or incurred 
                for--
                            ``(i) qualified long-term care insurance, 
                        and
                            ``(ii) qualified long-term care.
                    ``(C) Qualified long-term care insurance.--For 
                purposes of subparagraph (B)(i)--
                            ``(i) In general.--Subject to clauses (ii) 
                        and (iii), the term `qualified long-term care 
                        insurance' means insurance under a policy or 
                        rider issued by a qualified issuer to be 
                        advertised, marketed, offered, or designed to 
                        provide coverage--
                                    ``(I) for not less than 12 
                                consecutive months for each covered 
                                person,
                                    ``(II) on an expense incurred, 
                                indemnity, or prepaid basis,
                                    ``(III) for 1 or more medically 
                                necessary diagnostic services, 
                                preventive services, therapeutic 
                                services, rehabilitation services, 
                                maintenance services, or personal care 
                                services, and
                                    ``(IV) provided in a setting other 
                                than an acute care unit of a hospital.
                            ``(ii) Coverage specifically excluded.--
                        Such term does not include any insurance under 
                        any policy or rider which is offered primarily 
                        to provide any combination of the following 
                        kinds of coverage:
                                    ``(I) Basic Medicare supplement 
                                coverage.
                                    ``(II) Basic hospital-based acute 
                                care expense coverage.
                                    ``(III) Basic medical-surgical 
                                expense coverage.
                                    ``(IV) Hospital confinement 
                                indemnity coverage.
                                    ``(V) Major medical expense 
                                coverage.
                                    ``(VI) Disability income protection 
                                coverage.
                                    ``(VII) Accident only coverage.
                                    ``(VIII) Specified disease 
                                coverage.
                                    ``(IX) Specified accident coverage.
                                    ``(X) Limited benefit health 
                                coverage.
                            ``(iii) Qualified issuer.--For purposes of 
                        clause (i), the term `qualified issuer' means 
                        any of the following:
                                    ``(I) Private insurance company.
                                    ``(II) Fraternal benefit society.
                                    ``(III) Nonprofit health 
                                corporation.
                                    ``(IV) Nonprofit hospital 
                                corporation.
                                    ``(V) Nonprofit medical service 
                                corporation.
                                    ``(VI) Prepaid health plan.
                    ``(D) Qualified long-term care.--The term 
                `qualified long-term care' means services described in 
                subparagraph (C)(i)(III) which may be covered under 
                qualified long-term care insurance.
            ``(4) Qualified surrender amounts.--The term `qualified 
        surrender amounts' means amounts received on the whole or 
        partial surrender, cancellation, or exchange of any life 
        insurance contract to the extent that, within 60 days of the 
        receipt of such amounts, such amounts are transferred to an 
        individual medical savings account.
    ``(d) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of an individual 
        medical savings account shall be included in the gross income 
        of the individual for whose benefit the account was 
        established.
            ``(2) Exception for certain distributions.--Paragraph (1) 
        shall not apply to any qualified distribution.
            ``(3) Rollovers.--Paragraph (1) shall not apply to any 
        portion of any payment or distribution which, within 60 days of 
        receipt of such payment or distribution, is paid into an 
        individual medical savings account or an individual retirement 
        account for the benefit of the individual for whom the account 
        from which such portion is transferred was maintained.
            ``(4) Excess contributions returned before due date of 
        return.--Paragraph (1) shall not apply to the distribution of 
        any contribution paid during a taxable year to an individual 
        medical savings account to the extent that such contribution 
        exceeds the amount allowable under subsection (b)(1)(A) if--
                    ``(A) such distribution is received on or before 
                the day prescribed by law (including extensions of 
                time) for filing such individual's return for such 
                taxable year, and
                    ``(B) such distribution is accompanied by the 
                amount of net income attributable to such excess 
                contribution.
        Any net income described in subparagraph (B) shall be included 
        in the gross income of the individual for the taxable year in 
        which it is received.
    ``(e) Tax Treatment of Accounts.--
            ``(1) Cessation of treatment as account.--
                    ``(A) In general.--If during any taxable year of an 
                individual who contributes to an individual medical 
                savings account--
                            ``(i) the requirements of subsection (b)(1) 
                        are not met, or
                            ``(ii) such individual engages in any 
                        transaction prohibited by section 4975 with 
                        respect to the account,
                the account shall cease to be an individual medical 
                savings account as of the first day of that taxable 
                year.
                    ``(B) Account treated as distributing all its 
                assets.--In any case in which any account ceases to be 
                an individual medical savings account by reason of 
                subparagraph (A) on the first day of any taxable year, 
                paragraph (1) of subsection (d) shall apply as if there 
                were a distribution on such first day in an amount 
                equal to the fair market value (on such first day) of 
                all assets in the account (on such first day).
            ``(2) Effect of pledging account as security.--If, during 
        any taxable year, the individual for whose benefit an 
        individual medical savings account is established uses the 
        account or any portion thereof as security for a loan, the 
        portion so used shall be treated as distributed to that 
        individual.
    ``(f) Additional Tax on Certain Amounts Included in Gross Income.--
            ``(1) Distribution not a qualified distribution.--If a 
        distribution--
                    ``(A) is made from an individual medical savings 
                account, and
                    ``(B) is not a qualified distribution,
        the tax liability (for the taxable year in which such 
        distribution is received) of such individual shall be increased 
        by an amount equal to 20 percent of the amount of the 
        distribution which is includible in the gross income of such 
        individual for such taxable year.
            ``(2) Disqualification cases.--If an amount is includible 
        in the gross income of an individual for a taxable year under 
        subsection (e), the tax liability of such individual under this 
        chapter for such taxable year shall be increased by an amount 
        equal to 20 percent of such amount required to be included in 
        gross income.
            ``(3) Disability or death cases.--Paragraphs (1) and (2) 
        shall not apply if the payment or distribution is made after 
        the individual for whose benefit the individual medical savings 
        account becomes disabled within the meaning of section 72(m)(7) 
        or dies.
    ``(g) Community Property Laws.--This section shall be applied 
without regard to any community property laws.
    ``(h) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of such 
account are held by a bank (as defined in section 408(n)) or another 
person who demonstrates, to the satisfaction of the Secretary, that--
            ``(1) the manner in which he will administer the account 
        will be consistent with the requirements of this section, and
            ``(2) the custodial account would, except for the fact that 
        it is not a trust, constitute an individual medical savings 
        account described in subsection (b).
For purposes of this title, in the case of a custodial account treated 
as a trust by reason of the preceding sentence, the custodian of such 
account shall be treated as the trustee thereof.
    ``(i) Reports.--The trustee of an individual medical savings 
account shall make such reports regarding such account to the Secretary 
and to the individual for whose benefit the account is maintained with 
respect to contributions, distributions, and such other matters as the 
Secretary may require under regulations. 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 those regulations.''.
    (b) Tax on Excess Contributions.--Section 4973 of such Code 
(relating to tax on excess contributions to individual retirement 
accounts, certain section 403(b) contracts, and certain individual 
retirement annuities) is amended--
            (1) by inserting ``individual medical savings accounts,'' 
        after ``accounts,'' in the heading of such section,
            (2) by redesignating paragraph (2) of subsection (a) as 
        paragraph (3) and by inserting after paragraph (1) the 
        following:
            ``(2) an individual medical savings account (within the 
        meaning of section 529(b)), or'',
            (3) by striking out ``or'' at the end of paragraph (1) of 
        subsection (a), and
            (4) by adding at the end thereof the following new 
        subsection:
    ``(d) Excess Contributions to Individual Medical Savings 
Accounts.--For purposes of this section, in the case of an individual 
medical savings account, the term `excess contributions' means the 
amount by which the amount contributed for the taxable year to the 
account exceeds the amount allowable under section 529(b)(1)(A) for 
such taxable year. For purposes of this subsection, any contribution 
which is distributed out of the individual medical savings account in a 
distribution to which section 529(d)(4) applies shall be treated as an 
amount not contributed.''.
    (d) Contribution Not To Be Treated as a Gift for Gift Tax 
Purposes.--Section 2503 of such Code (relating to taxable gifts) is 
amended by adding at the end thereof the following new subsection:
    ``(h) Individual Medical Savings Accounts.--For purposes of 
subsection (b), any payment made by an individual to an individual 
medical savings account described in section 529(b) shall not be 
considered a gift of a future interest in property to the extent that 
such payment is allowed under section 529.''.
    (e) Tax on Prohibited Transactions.--Section 4975 of such Code 
(relating to prohibited transactions) is amended--
            (1) by adding at the end of subsection (c) the following 
        new paragraph:
            ``(4) Special rule for individual medical savings 
        accounts.--An individual for whose benefit an individual 
        medical savings account 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 an individual medical savings account by reason of 
        the application of section 529(e)(1)(A) to such account.'', and
            (2) by inserting ``, or an individual medical savings 
        account described in section 529(b)'' in subsection (e)(1) 
        after ``described in section 408(a)''.
    (f) Failure To Provide Reports on Individual Medical Savings 
Accounts.--Section 6693 of such Code (relating to failure to provide 
reports on individual retirement account or annuities) is amended--
            (1) by inserting ``or an individual medical savings 
        account'' after ``annuities'' in the heading of such section, 
        and
            (2) by adding at the end of subsection (a) the following: 
        ``The person required by section 529(i) to file a report 
        regarding an individual medical savings account at the time and 
        in the manner required by such section shall pay a penalty of 
        $50 for each failure unless it is shown that such failure is 
        due to reasonable cause.''.
    (g) Exclusion From Gross Income.--
            (1) Part III of subchapter B of chapter 1 of such Code 
        (relating to items specifically excluded from gross income) is 
        amended by redesignating section 136 as section 137 and by 
        inserting after section 135 the following new section:

``SEC. 136. INDIVIDUAL MEDICAL SAVINGS ACCOUNT DISTRIBUTIONS.

    ``In the case of an individual, and except as is provided in 
section 529(d), gross income does not include qualified distributions 
from an individual medical savings account.''.
            (2) The table of sections for such part III is amended by 
        striking out the item relating to section 136 and inserting in 
        lieu thereof the following new items:

                              ``Sec. 136. Individual medical savings 
                                        account distributions.
                              ``Sec. 137. Cross references to other 
                                        Acts.''.
    (h) Conforming Amendments.--
            (1) The table of parts for subchapter F of chapter 1 of 
        such Code is amended by adding at the end thereof the following 
        new item:

                              ``Part VIII. Individual medical savings 
                                        accounts.''.
            (2) The table of sections for chapter 43 of such Code is 
        amended by striking out the item relating to section 4973 and 
        inserting in lieu thereof the following:

                              ``Sec. 4973. Tax on excess contributions 
                                        to individual retirement 
                                        accounts, individual medical 
                                        savings accounts, certain 
                                        403(b) contracts, and certain 
                                        individual retirement 
                                        annuities.''.
            (3) The table of sections for subchapter B of chapter 68 of 
        such Code is amended by inserting ``or on individual medical 
        savings accounts'' after ``annuities'' in the item relating to 
        section 6693.
    (i) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1993.

SEC. 2. EMPLOYER CONTRIBUTIONS TO INDIVIDUAL MEDICAL SAVINGS ACCOUNT 
              NOT INCLUDED IN INDIVIDUAL'S GROSS INCOME.

    (a) In General.--Section 106 of the Internal Revenue Code of 1986 
(relating to contributions by employer to accident and health plans) is 
amended by inserting ``or an employer-provided contribution to an 
individual medical savings account under section 529(b)(1)(F)'' after 
``health plan''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1993.

SEC. 3. QUALIFIED LONG-TERM CARE INSURANCE TREATED AS ACCIDENT AND 
              HEALTH INSURANCE FOR PURPOSES OF TAXATION OF LIFE 
              INSURANCE COMPANIES.

    (a) In General.--Section 818 of the Internal Revenue Code of 1986 
(relating to other definitions and special rules) is amended by adding 
at the end thereof the following new subsection:
    ``(g) Qualified Long-Term Care Insurance Treated as Accident or 
Health Insurance.--For purposes of this part--
            ``(1) In general.--Any reference to accident or health 
        insurance shall be treated as including a reference to 
        qualified long-term care insurance.
            ``(2) Qualified long-term care insurance.--For purposes of 
        this subsection, the term `qualified long-term care insurance' 
        has the meaning given such term by section 529(c)(3)(C).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1993.

SEC. 4. QUALIFIED LONG-TERM CARE INSURANCE TREATED AS ACCIDENT AND 
              HEALTH INSURANCE FOR PURPOSES OF EXCLUSION FOR BENEFITS 
              RECEIVED UNDER SUCH INSURANCE AND FOR EMPLOYER 
              CONTRIBUTIONS FOR SUCH INSURANCE.

    (a) In General.--Section 105 of the Internal Revenue Code of 1986 
(relating to amounts received under accident and health plans) is 
amended by adding at the end thereof the following new subsection:
    ``(j) Special Rules Relating to Qualified Long-Term Care 
Insurance.--For purposes of section 104, this section, and section 
106--
            ``(1) Benefits treated as payable for sickness, etc.--Any 
        benefit received through qualified long-term care insurance (as 
        defined in section 529(c)(3)(C)) shall be treated as received 
        for personal injuries or sickness.
            ``(2) Expenses for which reimbursement provided under 
        qualified long-term care insurance treated as incurred for 
        medical care.--Expenses incurred by a taxpayer for which 
        reimbursement is paid through qualified long-term care 
        insurance (as so defined) shall be treated for purposes of 
        subsection (b) as incurred for medical care (as defined in 
        section 213(d)).
            ``(3) References to accident and health plans.--Any 
        reference to an accident or health plan shall be treated as 
        including a reference to a plan providing qualified long-term 
        care insurance.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1993.

                                 <all>

S 1105 IS----2
S 1105 IS----3
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