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104TH CONGRESS

1ST SESSION H. R. 720

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

for contributions to a Medisave account.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 27, 1995

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 1995’’.

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 1995, 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 by substituting ‘calendar

7 year 1994’ for ‘calendar year 1992’ in sub8 paragraph (B) thereof.

9 If any increase under the preceding sentence is

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

11 rounded to the nearest multiple of $50.

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

13 section—

14 ‘‘(1) MEDISAVE ACCOUNT.—

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

16 account’ means a trust created or organized in

17 the United States exclusively for the purpose of

18 paying the medical expenses of the beneficiaries

19 of such trust, but only if the written governing

20 instrument creating the trust meets the follow21 ing requirements:

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

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

24 no contribution will be accepted unless it is

25 in cash, and contributions will not be ac-
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1 cepted in excess of the amount allowed as

2 a deduction under this section for the tax3 able year.

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

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

6 demonstrates to the satisfaction of the Sec7 retary that the manner in which such per8 son will administer the trust will be con9 sistent with the requirements of this

10 section.

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

12 be invested in life insurance contracts.

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

14 be commingled with other property except

15 in a common trust fund or common invest16 ment fund.

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

18 the balance in his account is nonforfeit19 able.

20 ‘‘(vi) Under regulations prescribed by

21 the Secretary, rules similar to the rules of

22 section 401(a)(9) shall apply to the dis23 tribution of the entire interest of bene24 ficiaries of such trust.
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1 ‘‘(B) TREATMENT OF COMPARABLE AC2 COUNTS HELD BY INSURANCE COMPANIES.—

3 For purposes of this section, an account held by

4 an insurance company in the United States

5 shall be treated as a Medisave account (and

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

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

8 insurance plan that includes a catastrophic

9 health plan (as defined in subsection

10 (c)(2)),

11 ‘‘(ii) such account is exclusively for

12 the purpose of paying the medical expenses

13 of the beneficiaries of such account who

14 are covered under such catastrophic health

15 plan, and

16 ‘‘(iii) the written instrument govern17 ing the account meets the requirements of

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

19 (A).

20 ‘‘(2) MEDICAL EXPENSES.—

21 ‘‘(A) IN GENERAL.—The term ‘medical ex22 penses’ means, with respect to an individual,

23 amounts paid or incurred by such individual

24 for—
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1 ‘‘(i) medical care (as defined in sec2 tion 213), or

3 ‘‘(ii) long-term care (as defined in

4 paragraph (3)),

5 for such individual, the spouse of such individ6 ual, and any dependent (as defined in section

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

8 such amounts are not compensated for by in9 surance or otherwise.

10 ‘‘(B) HEALTH PLAN COVERAGE MAY NOT

11 BE PURCHASED FROM ACCOUNT.—

12 ‘‘(i) IN GENERAL.—Such term shall

13 not include any amount paid for coverage

14 under a health plan.

15 ‘‘(ii) EXCEPTION.—Clause (i) shall

16 not apply to coverage of an individual

17 under a catastrophic health plan or under

18 a long-term care insurance plan.

19 ‘‘(3) LONG-TERM CARE.—

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

21 care’ means diagnostic, preventive, therapeutic,

22 rehabilitative, maintenance, or personal care

23 services which are required by, and provided to,

24 a chronically ill individual, which have as their

25 primary purpose the direct provision of needed
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1 assistance with 1 or more activities of daily liv2 ing (or the alleviation of the conditions neces3 sitating such assistance) that the individual is

4 certified under subparagraph (B) as being un5 able to perform, and which are provided in a

6 setting other than an acute care unit of a hos7 pital pursuant to a continuing plan of care pre8 scribed by a physician or registered professional

9 nurse. Such term does not include food or lodg10 ing provided in an institutional or other setting,

11 or basic living services associated with the

12 maintenance of a household or participation in

13 community life, such as case management,

14 transportation or legal services, or the perform15 ance of home maintenance or household chores.

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

17 term ‘chronically ill individual’ means an indi18 vidual who is certified by a physician or reg19 istered professional nurse as being unable to

20 perform at least 3 activities of daily living with21 out substantial assistance from another individ22 ual. For purposes of this paragraph, the term

23 ‘activities of daily living’ means bathing, dress24 ing, eating, toileting, transferring, and walking.
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1 ‘‘(4) TIME WHEN CONTRIBUTIONS DEEMED

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

3 on the last day of the preceding taxable year if the

4 contribution is made on account of such taxable year

5 and is made not later than the time prescribed by

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

7 including extensions thereof).

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

9 ‘‘(1) IN GENERAL.—Any amount paid or dis10 tributed out of a Medisave account shall be included

11 in the gross income of the individual for whose bene12 fit such account was established unless such amount

13 is used exclusively to pay the medical expenses of

14 such individual.

15 ‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE16 FORE DUE DATE OF RETURN.—Paragraph (1) shall

17 not apply to the distribution of any contribution paid

18 during a taxable year to a Medisave account to the

19 extent that such contribution exceeds the amount al20 lowable as a deduction under subsection (a) if—

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

22 individual on or before the last day prescribed

23 by law (including extensions of time) for filing

24 such individual’s return for such taxable year,

25 and
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1 ‘‘(B) such distribution is accompanied by

2 the amount of net income attributable to such

3 excess contribution.

4 Any net income described in subparagraph (B) shall

5 be included in the gross income of the individual for

6 the taxable year in which it is received.

7 ‘‘(3) PENALTY FOR DISTRIBUTIONS NOT USED

8 FOR MEDICAL EXPENSES.—

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

10 this chapter for any taxable year in which there

11 is a payment or distribution from a Medisave

12 account which is not used to pay the medical

13 expenses of the individual for whose benefit the

14 account was established shall be increased by

15 10 percent of the amount of such payment or

16 distribution which is includible in gross income

17 under paragraph (1).

18 ‘‘(B) ACCOUNT BALANCE LIMITATION.—

19 If—

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

21 required to be increased under subpara22 graph (A) by reason of a distribution, and

23 ‘‘(ii) after such distribution, the ag24 gregate balance of all Medisave accounts

25 established for the benefit of the individ-
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1 ual, is less than the amount of the deduct2 ible under the catastrophic health plan cov3 ering such individual,

4 subparagraph (A) shall be applied by substitut5 ing ‘50 percent’ for ‘10 percent’.

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

7 apply to any amount paid or distributed out of a

8 Medisave account to the individual for whose benefit

9 the account is maintained if the entire amount re10 ceived (including money and any other property) is

11 paid into another Medisave account for the benefit

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

13 the day on which he received the payment or dis14 tribution.

15 ‘‘(f) TAX TREATMENT OF ACCOUNTS.—

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

17 account is exempt from taxation under this subtitle

18 unless such account has ceased to be a Medisave ac19 count by reason of paragraph (2) or (3). Notwith20 standing the preceding sentence, any such account

21 shall be subject to the taxes imposed by section 511

22 (relating to imposition of tax on unrelated business

23 income of charitable, etc. organizations).

24 ‘‘(2) ACCOUNT TERMINATES IF INDIVIDUAL EN25 GAGES IN PROHIBITED TRANSACTION.—
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1 ‘‘(A) IN GENERAL.—If, during any taxable

2 year of the individual for whose benefit the

3 Medisave account was established, such individ4 ual engages in any transaction prohibited by

5 section 4975 with respect to the account, the

6 account ceases to be a Medisave account as of

7 the first day of that taxable year.

8 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

9 ALL ITS ASSETS.—In any case in which any ac10 count ceases to be a Medisave account by rea11 son of subparagraph (A) on the first day of any

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

13 shall be applied as if there were a distribution

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

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

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

17 of such distribution were used to pay medical

18 expenses.

19 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU20 RITY.—If, during any taxable year, the individual for

21 whose benefit a Medisave account was established

22 uses the account or any portion thereof as security

23 for a loan, the portion so used is treated as distrib24 uted to that individual and not used to pay medical

25 expenses.
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1 ‘‘(g) CUSTODIAL ACCOUNTS.—For purposes of this

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

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

4 bank (as defined in section 408(n)) or another per5 son who demonstrates to the satisfaction of the Sec6 retary that the manner in which he will administer

7 the account will be consistent with the requirements

8 of this section, and

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

10 fact that it is not a trust, constitute a Medisave ac11 count described in subsection (d).

12 For purposes of this title, in the case of a custodial ac13 count treated as a trust by reason of the preceding sen14 tence, the custodian of such account shall be treated as

15 the trustee thereof.

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

17 shall make such reports regarding such account to the

18 Secretary and to the individual for whose benefit the ac19 count is maintained with respect to contributions, dis20 tributions, and such other matters as the Secretary may

21 require under regulations. The reports required by this

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

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

24 manner as may be required by those regulations.’’
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1 (b) DEDUCTION ALLOWED WHETHER OR NOT INDI2 VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a)

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

4 paragraph (15) the following new paragraph:

5 ‘‘(16) MEDISAVE ACCOUNTS.—The deduction

6 allowed by section 220.’’

7 (c) DISTRIBUTIONS FROM MEDISAVE ACCOUNTS

8 NOT ALLOWED AS MEDICAL EXPENSE DEDUCTION.—

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

10 end thereof the following new subsection:

11 ‘‘(f) COORDINATION WITH MEDISAVE ACCOUNTS.—

12 The amount otherwise taken into account under sub13 section (a) as expenses paid for medical care shall be re14 duced by the amount (if any) of the distributions from

15 any Medisave account of the taxpayer during the taxable

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

17 being used for medical care.’’

18 (d) EXCLUSION OF EMPLOYER CONTRIBUTIONS TO

19 MEDISAVE ACCOUNTS FROM EMPLOYMENT TAXES.—

20 (1) SOCIAL SECURITY TAXES.—

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

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

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

24 end of paragraph (21) and inserting ‘‘; or’’, and
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1 by inserting after paragraph (21) the following

2 new paragraph:

3 ‘‘(22) remuneration paid to or on behalf of an

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

5 payment of such remuneration it is reasonable to be6 lieve that a corresponding deduction is allowable

7 under section 220.’’

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

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

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

11 period at the end of paragraph (18) and insert12 ing ‘‘; or’’, and by inserting after paragraph

13 (18) the following new paragraph:

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

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

16 payment of such remuneration it is reasonable to be17 lieve that a corresponding deduction is allowable

18 under section 220 of the Internal Revenue Code of

19 1986.’’

20 (2) RAILROAD RETIREMENT TAX.—Subsection

21 (e) of section 3231 of such Code is amended by add22 ing at the end thereof the following new paragraph:

23 ‘‘(10) EMPLOYER CONTRIBUTIONS TO

24 MEDISAVE ACCOUNTS.—The term ‘compensation’

25 shall not include any payment made to or on behalf
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1 of an employee if (and to the extent that) at the

2 time of payment of such remuneration it is reason3 able to believe that a corresponding deduction is al4 lowable under section 220.’’

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

6 section 3306 of such Code is amended by striking

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

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

9 or’’, and by inserting after paragraph (16) the fol10 lowing new paragraph:

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

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

13 payment of such remuneration it is reasonable to be14 lieve that a corresponding deduction is allowable

15 under section 220.’’

16 (4) WITHHOLDING TAX.—Subsection (a) of sec17 tion 3401 of such Code is amended by striking ‘‘or’’

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

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

20 and by inserting after paragraph (20) the following

21 new paragraph:

22 ‘‘(21) to or on behalf of an employee if (and to

23 the extent that) at the time of payment of such re24 muneration it is reasonable to believe that a cor-
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1 responding deduction is allowable under section

2 220.’’

3 (e) TAX ON EXCESS CONTRIBUTIONS.—Section 4973

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

5 individual retirement accounts, certain section 403(b) con6 tracts, and certain individual retirement annuities) is

7 amended—

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

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

10 (2) by redesignating paragraph (2) of sub11 section (a) as paragraph (3) and by inserting after

12 paragraph (1) the following:

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

14 section 220(d)),’’,

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

16 (1) of subsection (a), and

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

18 new subsection:

19 ‘‘(d) EXCESS CONTRIBUTIONS TO MEDISAVE AC20 COUNTS.—For purposes of this section, in the case of a

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

22 the term ‘excess contributions’ means the amount by

23 which the amount contributed for the taxable year to the

24 account exceeds the amount allowable as a deduction

25 under section 220 for such taxable year. For purposes of
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1 this subsection, any contribution which is distributed out

2 of the Medisave account in a distribution to which section

3 220(e)(2) applies shall be treated as an amount not con4 tributed.’’

5 (f) TAX ON PROHIBITED TRANSACTIONS.—Section

6 4975 of such Code (relating to prohibited transactions)

7 is amended—

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

9 following new paragraph:

10 ‘‘(4) SPECIAL RULE FOR MEDISAVE AC11 COUNTS.—An individual for whose benefit a

12 Medisave account (within the meaning of section

13 220(d)) is established shall be exempt from the tax

14 imposed by this section with respect to any trans15 action concerning such account (which would other16 wise be taxable under this section) if, with respect

17 to such transaction, the account ceases to be a

18 Medisave account by reason of the application of

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

20 (2) by inserting ‘‘or a Medisave account de21 scribed in section 220(d)’’ in subsection (e)(1) after

22 ‘‘described in section 408(a)’’.

23 (g) FAILURE TO PROVIDE REPORTS ON MEDISAVE

24 ACCOUNTS.—Section 6693 of such Code (relating to fail-
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1 ure to provide reports on individual retirement account or

2 annuities) is amended—

3 (1) by inserting ‘‘OR ON MEDISAVE AC4 COUNTS’’ after ‘‘ANNUITIES’’ in the heading of

5 such section, and

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

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

8 file a report regarding a Medisave account at the

9 time and in the manner required by such section

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

11 is shown that such failure is due to reasonable

12 cause.’’

13 (h) CLERICAL AMENDMENTS.—

14 (1) The table of sections for part VII of sub15 chapter B of chapter 1 of such Code is amended by

16 striking the last item and inserting the following:

‘‘Sec. 220. Medisave accounts.

‘‘Sec. 221. Cross reference.’’

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

18 Code is amended by striking the item relating to sec19 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.’’

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

21 chapter 68 of such Code is amended by inserting ‘‘or
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1 on Medisave accounts’’ after ‘‘annuities’’ in the item

2 relating to section 6693.

3 (i) EFFECTIVE DATE.—The amendments made by

4 this section shall apply to taxable years beginning after

5 December 31, 1995.

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