I

103D CONGRESS

1ST SESSION H. R. 3333

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

for contributions to a Medisave account.

IN THE HOUSE OF REPRESENTATIVES

OCTOBER 21, 1993

Mr. HOKE 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 individuals a deduction for contributions to a Medisave

account.

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 ‘‘Medisave Patient

5 Empowerment Act of 1993’’.

6 SEC. 2. MEDISAVE 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
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1 by redesignating section 220 as section 221 and by insert2 ing after section 219 the following new section:

3 ‘‘SEC. 220. MEDISAVE ACCOUNTS.

4 ‘‘(a) DEDUCTION ALLOWED.—In the case of an eligi5 ble individual, there shall be allowed as a deduction the

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

7 behalf of such individual to a Medisave account for the

8 benefit of such individual and (if any) such individual’s

9 spouse and dependents if such spouse and dependents are

10 eligible individuals.

11 ‘‘(b) LIMITATIONS.—

12 ‘‘(1) ONLY 1 ACCOUNT PER FAMILY.—Except as

13 provided in regulations prescribed by this Secretary,

14 no deduction shall be allowed under subsection (a)

15 for amounts paid to any Medisave account for the

16 benefit of an individual, such individual’s spouse, or

17 any dependent of such individual or spouse if such

18 individual, spouse, or dependent is a beneficiary of

19 any other Medisave account.

20 ‘‘(2) DOLLAR LIMITATION.—The amount allow21 able as a deduction under subsection (a) for the tax22 able year shall not exceed the lesser of—

23 ‘‘(A) the lowest deductible under any cata24 strophic health plan providing coverage to any

25 beneficiary of the Medisave account, or
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1 ‘‘(B)(i) $2,500, or

2 ‘‘(ii) $5,000 if the catastrophic health plan

3 covering the taxpayer provides coverage for

4 more than 1 individual.

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

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

7 individual’ means any individual who is covered

8 under a catastrophic health plan throughout the cal9 endar year in which or with which the taxable year

10 ends.

11 ‘‘(2) CATASTROPHIC HEALTH PLAN.—For pur12 poses of paragraph (1)—

13 ‘‘(A) IN GENERAL.—The term ‘cata14 strophic health plan’ means a health plan cover15 ing specified expenses incurred by an individual

16 for medical care for such individual and the

17 spouse and dependents (as defined in section

18 152) of such individual only to the extent such

19 expenses covered by the plan for any calendar

20 year exceed $1,800 ($3,600 if the catastrophic

21 health plan covering the taxpayer provides cov22 erage for more than 1 individual) or such high23 er amounts as may be specified by the plan.

24 ‘‘(B) COST-OF-LIVING ADJUSTMENT.—In

25 the case of any calendar year after 1994, each
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1 dollar amount in subparagraph (A) shall be in2 creased by an amount equal to—

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

4 ‘‘(ii) the cost-of-living adjustment de5 termined under section 1(f)(3) for such

6 calendar year.

7 If any increase under the preceding sentence is

8 not a multiple of $50, such increase shall be

9 rounded to the nearest multiple of $50.

10 ‘‘(d) MEDISAVE ACCOUNTS.—For purposes of this

11 section—

12 ‘‘(1) MEDISAVE ACCOUNT.—

13 ‘‘(A) IN GENERAL.—The term ‘Medisave

14 account’ means a trust created or organized in

15 the United States exclusively for the purpose of

16 paying the medical expenses of the beneficiaries

17 of such trust, but only if the written governing

18 instrument creating the trust meets the follow19 ing requirements:

20 ‘‘(i) Except in the case of a rollover

21 contribution described in subsection (e)(4),

22 no contribution will be accepted unless it is

23 in cash, and contributions will not be ac24 cepted in excess of the amount allowed as

25 a deduction under this section for the tax-
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1 able year (or would be allowed as such a

2 deduction but for subsection (c)(1)(C)).

3 ‘‘(ii) The trustee is a bank (as defined

4 in section 408(n)) or another person who

5 demonstrates to the satisfaction of the Sec6 retary that the manner in which such per7 son will administer the trust will be con8 sistent with the requirements of this sec9 tion.

10 ‘‘(iii) No part of the trust assets will

11 be invested in life insurance contracts.

12 ‘‘(iv) The assets of the trust will not

13 be commingled with other property except

14 in a common trust fund or common invest15 ment fund.

16 ‘‘(v) The interest of an individual in

17 the balance in his account is nonforfeit18 able.

19 ‘‘(vi) Under regulations prescribed by

20 the Secretary, rules similar to the rules of

21 section 401(a)(9) shall apply to the dis22 tribution of the entire interest of bene23 ficiaries of such trust.

24 ‘‘(B) TREATMENT OF COMPARABLE AC25 COUNTS HELD BY INSURANCE COMPANIES.—
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1 For purposes of this section, an account held by

2 an insurance company in the United States

3 shall be treated as a Medisave account (and

4 such company shall be treated as a bank) if—

5 ‘‘(i) such account is part of a health

6 insurance plan that includes a catastrophic

7 health plan (as defined in subsection

8 (c)(2)),

9 ‘‘(ii) such account is exclusively for

10 the purpose of paying the medical expenses

11 of the beneficiaries of such account who

12 are covered under such catastrophic health

13 plan, and

14 ‘‘(iii) the written instrument govern15 ing the account meets the requirements of

16 clauses (i), (v), and (vi) of subparagraph

17 (A).

18 ‘‘(2) MEDICAL EXPENSES.—

19 ‘‘(A) IN GENERAL.—The term ‘medical ex20 penses’ means, with respect to an individual,

21 amounts paid or incurred by such individual

22 for—

23 ‘‘(i) medical care (as defined in sec24 tion 213), or
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1 ‘‘(ii) long-term care (as defined in

2 paragraph (3)),

3 for such individual, the spouse of such individ4 ual, and any dependent (as defined in section

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

6 such amounts are not compensated for by in7 surance or otherwise.

8 ‘‘(B) HEALTH PLAN COVERAGE MAY NOT

9 BE PURCHASED FROM ACCOUNT.—

10 ‘‘(i) IN GENERAL.—Such term shall

11 not include any amount paid for coverage

12 under a health plan.

13 ‘‘(ii) EXCEPTION.—Clause (i) shall

14 not apply to coverage of an individual

15 under a catastrophic health plan or under

16 a long-term care insurance plan.

17 ‘‘(3) LONG-TERM CARE.—

18 ‘‘(A) IN GENERAL.—The term ‘long-term

19 care’ means diagnostic, preventive, therapeutic,

20 rehabilitative, maintenance, or personal care

21 services which are required by, and provided to,

22 a chronically ill individual, which have as their

23 primary purpose the direct provision of needed

24 assistance with 1 or more activities of daily liv25 ing (or the alleviation of the conditions neces-
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1 sitating such assistance) that the individual is

2 certified under subparagraph (B) as being un3 able to perform, and which are provided in a

4 setting other than an acute care unit of a hos5 pital pursuant to a continuing plan of care pre6 scribed by a physician or registered professional

7 nurse. Such term does not include food or lodg8 ing provided in an institutional or other setting,

9 or basic living services associated with the

10 maintenance of a household or participation in

11 community life, such as case management,

12 transportation or legal services, or the perform13 ance of home maintenance or household chores.

14 ‘‘(B) CHRONICALLY ILL INDIVIDUAL.—The

15 term ‘chronically ill individual’ means an indi16 vidual who is certified by a physician or reg17 istered professional nurse as being unable to

18 perform at least 3 activities of daily living with19 out substantial assistance from another individ20 ual. For purposes of this paragraph, the term

21 ‘activities of daily living’ means bathing, dress22 ing, eating, toileting, transferring, and walking.

23 ‘‘(4) TIME WHEN CONTRIBUTIONS DEEMED

24 MADE.—A contribution shall be deemed to be made

25 on the last day of the preceding taxable year if the
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1 contribution is made on account of such taxable year

2 and is made not later than the time prescribed by

3 law for filing the return for such taxable year (not

4 including extensions thereof).

5 ‘‘(e) TAX TREATMENT OF DISTRIBUTIONS.—

6 ‘‘(1) IN GENERAL.—Any amount paid or dis7 tributed out of a Medisave account shall be included

8 in the gross income of the individual for whose bene9 fit such account was established unless such amount

10 is used exclusively to pay the medical expenses of

11 such individual.

12 ‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE13 FORE DUE DATE OF RETURN.—Paragraph (1) shall

14 not apply to the distribution of any contribution paid

15 during a taxable year to a Medisave account to the

16 extent that such contribution exceeds the amount al17 lowable as a deduction under subsection (a) if—

18 ‘‘(A) such distribution is received by the

19 individual on or before the last day prescribed

20 by law (including extensions of time) for filing

21 such individual’s return for such taxable year,

22 and

23 ‘‘(B) such distribution is accompanied by

24 the amount of net income attributable to such

25 excess contribution.
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1 Any net income described in subparagraph (B) shall

2 be included in the gross income of the individual for

3 the taxable year in which it is received.

4 ‘‘(3) PENALTY FOR DISTRIBUTIONS NOT USED

5 FOR MEDICAL EXPENSES.—

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

7 this chapter for any taxable year in which there

8 is a payment or distribution from a Medisave

9 account which is not used to pay the medical

10 expenses of the individual for whose benefit the

11 account was established shall be increased by

12 10 percent of the amount of such payment or

13 distribution which is includible in gross income

14 under paragraph (1).

15 ‘‘(B) ACCOUNT BALANCE LIMITATION.—

16 If—

17 ‘‘(i) the tax imposed by this chapter is

18 required to be increased under subpara19 graph (A) by reason of a distribution, and

20 ‘‘(ii) after such distribution, the ag21 gregate balance of all Medisave accounts

22 established for the benefit of the individ23 ual, is less than the amount of the deduct24 ible under the catastrophic health plan cov25 ering such individual,
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1 subparagraph (A) shall be applied by substitut2 ing ‘50 percent’ for ‘10 percent’.

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

4 apply to any amount paid or distributed out of a

5 Medisave account to the individual for whose benefit

6 the account is maintained if the entire amount re7 ceived (including money and any other property) is

8 paid into another Medisave account for the benefit

9 of such individual not later than the 60th day after

10 the day on which he received the payment or dis11 tribution.

12 ‘‘(f) TAX TREATMENT OF ACCOUNTS.—

13 ‘‘(1) EXEMPTION FROM TAX.—Any Medisave

14 account is exempt from taxation under this subtitle

15 unless such account has ceased to be a Medisave ac16 count by reason of paragraph (2) or (3). Notwith17 standing the preceding sentence, any such account

18 shall be subject to the taxes imposed by section 511

19 (relating to imposition of tax on unrelated business

20 income of charitable, etc. organizations).

21 ‘‘(2) ACCOUNT TERMINATES IF INDIVIDUAL EN22 GAGES IN PROHIBITED TRANSACTION.—

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

24 year of the individual for whose benefit the

25 Medisave account was established, such individ-
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1 ual engages in any transaction prohibited by

2 section 4975 with respect to the account, the

3 account ceases to be a Medisave account as of

4 the first day of that taxable year.

5 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

6 ALL ITS ASSETS.—In any case in which any ac7 count ceases to be a Medisave account by rea8 son of subparagraph (A) on the first day of any

9 taxable year, paragraph (1) of subsection (e)

10 shall be applied as if there were a distribution

11 on such first day in an amount equal to the fair

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

13 the account (on such first day) and no portion

14 of such distribution were used to pay medical

15 expenses.

16 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU17 RITY.—If, during any taxable year, the individual for

18 whose benefit a Medisave account was established

19 uses the account or any portion thereof as security

20 for a loan, the portion so used is treated as distrib21 uted to that individual and not used to pay medical

22 expenses.

23 ‘‘(g) CUSTODIAL ACCOUNTS.—For purposes of this

24 section, a custodial account shall be treated as a trust if—
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1 ‘‘(1) the assets of such account are held by a

2 bank (as defined in section 408(n)) or another per3 son who demonstrates to the satisfaction of the Sec4 retary that the manner in which he will administer

5 the account will be consistent with the requirements

6 of this section, and

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

8 fact that it is not a trust, constitute a Medisave ac9 count described in subsection (d).

10 For purposes of this title, in the case of a custodial ac11 count treated as a trust by reason of the preceding sen12 tence, the custodian of such account shall be treated as

13 the trustee thereof.

14 ‘‘(h) REPORTS.—The trustee of a Medisave account

15 shall make such reports regarding such account to the

16 Secretary and to the individual for whose benefit the ac17 count is maintained with respect to contributions, dis18 tributions, and such other matters as the Secretary may

19 require under regulations. The reports required by this

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

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

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

23 (b) DEDUCTION ALLOWED WHETHER OR NOT INDI24 VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a)
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1 of section 62 of such Code is amended by inserting after

2 paragraph (17) the following new paragraph:

3 ‘‘(18) MEDISAVE ACCOUNTS.—The deduction

4 allowed by section 220.’’

5 (c) DISTRIBUTIONS FROM MEDISAVE ACCOUNTS

6 NOT ALLOWED AS MEDICAL EXPENSE DEDUCTION.—

7 Section 213 of such Code is amended by adding at the

8 end thereof the following new subsection:

9 ‘‘(g) COORDINATION WITH MEDISAVE ACCOUNTS.—

10 The amount otherwise taken into account under sub11 section (a) as expenses paid for medical care shall be re12 duced by the amount (if any) of the distributions from

13 any Medisave account of the taxpayer during the taxable

14 year which is not includible in gross income by reason of

15 being used for medical care.’’

16 (d) EXCLUSION OF EMPLOYER CONTRIBUTIONS TO

17 MEDISAVE ACCOUNTS FROM EMPLOYMENT TAXES.—

18 (1) SOCIAL SECURITY TAXES.—

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

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

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

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

23 by inserting after paragraph (21) the following

24 new paragraph:
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1 ‘‘(22) remuneration paid to or on behalf of an

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

3 payment of such remuneration it is reasonable to be4 lieve that a corresponding deduction is allowable

5 under section 220.’’

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

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

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

9 period at the end of paragraph (18) and insert10 ing ‘‘; or’’, and by inserting after paragraph

11 (18) the following new paragraph:

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

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

14 payment of such remuneration it is reasonable to be15 lieve that a corresponding deduction is allowable

16 under section 220 of the Internal Revenue Code of

17 1986.’’

18 (2) RAILROAD RETIREMENT TAX.—Subsection

19 (e) of section 3231 of such Code is amended by add20 ing at the end thereof the following new paragraph:

21 ‘‘(10) EMPLOYER CONTRIBUTIONS TO

22 MEDISAVE ACCOUNTS.—The term ‘compensation’

23 shall not include any payment made to or on behalf

24 of an employee if (and to the extent that) at the

25 time of payment of such remuneration it is reason-
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1 able to believe that a corresponding deduction is al2 lowable under section 220.’’

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

4 section 3306 of such Code is amended by striking

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

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

7 or’’, and by inserting after paragraph (16) the fol8 lowing new paragraph:

9 ‘‘(17) remuneration paid to or on behalf of an

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

11 payment of such remuneration it is reasonable to be12 lieve that a corresponding deduction is allowable

13 under section 220.’’

14 (4) WITHHOLDING TAX.—Subsection (a) of sec15 tion 3401 of such Code is amended by striking ‘‘or’’

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

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

18 and by inserting after paragraph (20) the following

19 new paragraph:

20 ‘‘(21) remuneration paid to or on behalf of an

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

22 payment of such remuneration it is reasonable to be23 lieve that a corresponding deduction is allowable

24 under section 220.’’
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1 (e) TAX ON EXCESS CONTRIBUTIONS.—Section 4973

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

3 individual retirement accounts, certain section 403(b) con4 tracts, and certain individual retirement annuities) is

5 amended—

6 (1) by inserting ‘‘MEDISAVE ACCOUNTS,’’

7 after ‘‘ACCOUNTS,’’ in the heading of such section,

8 (2) by redesignating paragraph (2) of sub9 section (a) as paragraph (3) and by inserting after

10 paragraph (1) the following:

11 ‘‘(2) a Medisave account (within the meaning of

12 section 220(d)),’’,

13 (3) by striking ‘‘or’’ at the end of paragraph

14 (1) of subsection (a), and

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

16 new subsection:

17 ‘‘(d) EXCESS CONTRIBUTIONS TO MEDISAVE AC18 COUNTS.—For purposes of this section, in the case of a

19 Medisave account (within the meaning of section 220(d)),

20 the term ‘excess contributions’ means the amount by

21 which the amount contributed for the taxable year to the

22 account exceeds the amount excludable from gross income

23 under section 220 for such taxable year. For purposes of

24 this subsection, any contribution which is distributed out

25 of the Medisave account in a distribution to which section
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1 220(e)(2) applies shall be treated as an amount not con2 tributed.’’

3 (f) TAX ON PROHIBITED TRANSACTIONS.—Section

4 4975 of such Code (relating to prohibited transactions)

5 is amended—

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

7 following new paragraph:

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

10 Medisave 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

16 Medisave account by reason of the application of

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

18 (2) by inserting ‘‘or a Medisave account de19 scribed in section 220(d)’’ in subsection (e)(1) after

20 ‘‘described in section 408(a)’’.

21 (g) FAILURE TO PROVIDE REPORTS ON MEDISAVE

22 ACCOUNTS.—Section 6693 of such Code (relating to fail23 ure to provide reports on individual retirement account or

24 annuities) is amended—
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1 (1) by inserting ‘‘OR ON MEDISAVE AC2 COUNTS’’ 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 Medisave account at the

7 time and in the manner required by such section

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

9 is shown that such failure is due to reasonable

10 cause.’’

11 (h) 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. Medisave accounts.

‘‘Sec. 221. Cross reference.’’

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

16 Code is amended by striking the item relating to sec17 tion 4973 and inserting the following:

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

accounts, medisave accounts, certain 403(b) contracts, and certain individual retirement annuities.’’

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

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

20 on Medisave accounts’’ after ‘‘annuities’’ in the item

21 relating to section 6693.
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1 (i) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1993.

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