II 

109TH CONGRESS 

2D SESSION S. 3585 

To amend the Internal Revenue Code of 1986 to improve and expand the 

availability of health savings accounts, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

JUNE 27, 2006 

Mr. HATCH 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 improve 

and expand the availability of health savings accounts, 

and for other purposes. 

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; AMENDMENT OF 1986 CODE. 

4 (a) SHORT TITLE.—This Act may be cited as the 

5 ‘‘HSA Improvement and Expansion Act of 2006’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 

9 to, or repeal of, a section or other provision, the reference 


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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986. 

3 SEC. 2. FINDINGS. 

4 The Congress finds the following: 

5 (1) The Medicare Prescription Drug, Improve6 ment, and Modernization Act of 2003 (Public Law 

7 108–173) authorizes health savings accounts (re8 ferred to in this section as ‘‘HSAs’’) into which indi9 viduals may make annual contributions of not more 

10 than $2,700, and families may make annual con11 tributions of not more than $5,450, to permit spend12 ing by individuals for their health care needs. 

13 (2) Federal law provides for obtaining health 

14 insurance coverage through a low premium health 

15 plan offered with a tax-favored HSA that typically 

16 costs substantially less than traditional health insur17 ance. 

18 (3) Giving individuals more direct control over 

19 their health care spending will encourage more pru20 dent use of health care services, help make the 

21 health care system more responsive to the needs of 

22 consumers, and improve access to health coverage 

23 for the uninsured. 


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1 (4) A broad range of improvements to the Fed2 eral laws governing HSAs are necessary to make 

3 them more attractive to consumers and employers. 

4 (5) The number of people covered in January 

5 2006 by products combining an HSA with a low pre6 mium health plan was 3,168,000, more than triple 

7 the 1,031,000 reported in March 2005. 

8 (6) HSAs have become an important option for 

9 consumers and employers who have struggled to af10 ford health insurance coverage. 

11 (7) According to a January 2006 census, 31 

12 percent of new enrollees in HSAs and low premium 

13 health plans in the individual market were previously 

14 uninsured. 

15 (8) HSAs combined with low premium health 

16 plans can provide an affordable and accessible health 

17 insurance option for individuals of all ages. 

18 (9) 50 percent of all people covered by HSAs 

19 and low premium health plans in the individual mar20 ket, including dependents covered under family 

21 plans, are 40 years of age or older. 

22 (10) Many States currently have in effect laws 

23 and regulations that require insurers to provide spe24 cific benefit coverage in the health insurance plans 

25 they offer, preventing individuals and small business 


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1 from enrolling in low premium health plans and 

2 making them ineligible for HSAs. 

3 SEC. 3. ACCELERATED FUNDING FOR HSAS THROUGH DIS4 TRIBUTIONS FROM BALANCES IN HEALTH 

5 REIMBURSEMENT AND FLEXIBLE SPENDING 

6 ARRANGEMENTS AND FROM INDIVIDUAL RE7 TIREMENT PLANS. 

8 (a) ONE-TIME FSA AND HRA ROLLOVERS TO

9 HSAS.— 

10 (1) IN GENERAL.—A plan shall not fail to be 

11 treated as a flexible spending arrangement or health 

12 reimbursement arrangement under section 105 or 

13 106 of the Internal Revenue Code of 1986 merely 

14 because— 

15 (A) such plan provides for a contribution 

16 to the health savings account (as defined in sec17 tion 223 of such Code) of the employee which 

18 meets the requirements of paragraph (2), and 

19 (B) such plan thereafter terminates with 

20 respect to such employee. 

21 (2) REQUIREMENTS.—A contribution meets the 

22 requirements of this paragraph if— 

23 (A) in the case of a flexible spending ar24 rangement (as defined in section 106(c)(2) of 

25 such Code) in existence on June 1, 2006, such 


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1 contribution is the remaining balance in such 

2 arrangement as of the last day of the plan year 

3 ending in or before the taxable year in which 

4 such contribution is made, 

5 (B) in the case of a health reimbursement 

6 arrangement in existence on June 1, 2006, such 

7 contribution is the remaining balance of the 

8 amount to be received in reimbursements under 

9 such arrangement as of the last day of the plan 

10 year ending in or before the taxable year in 

11 which such contribution is made, and 

12 (C) such contribution is made by the em13 ployer directly to the health savings account of 

14 the employee not later than 60 days after the 

15 end of the plan year of such flexible spending 

16 arrangement or health reimbursement arrange17 ment. 

18 (3) TREATMENT AS ROLLOVER CONTRIBU19 TION.—For purposes of sections 223 and 4973 of 

20 such Code, a contribution which meets the require21 ments of paragraph (2) shall be treated as a rollover 

22 contribution described in section 223(f)(5) of such 

23 Code. 

24 (4) TAX TREATMENT RELATING TO CONTRIBU25 TIONS.—For purposes of this title— 


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1 (A) INCOME TAX.—Gross income shall not 

2 include the amount of any contribution under 

3 this subsection. 

4 (B) EMPLOYMENT TAXES.—Amounts con5 tributed to a health savings account under this 

6 subsection shall be treated as a payment de7 scribed in section 106(d) of such Code. 

8 (C) COMPARABILITY EXCISE TAX.—Section 

9 4980G of such Code shall not apply to contribu10 tions made under this subsection. 

11 (5) TERMINATION.—This paragraph shall not 

12 apply to any taxable year beginning after December 

13 31, 2011. 

14 (b) ONE-TIME DISTRIBUTION FROM INDIVIDUAL RE15 TIREMENT PLANS TO FUND HSAS.— 

16 (1) IN GENERAL.—Section 402 (relating to tax17 ability of beneficiary of employees’ trust) is amended 

18 by adding at the end the following new subsection: 

19 ‘‘(l) HEALTH SAVINGS ACCOUNT FUNDING DIS20 TRIBUTION FROM INDIVIDUAL RETIREMENT PLANS.— 

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

22 who is an eligible individual and who elects the ap23 plication of this subsection for a taxable year, gross 

24 income of the employee for the taxable year does not 

25 include a qualified HSA funding distribution to the 


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1 extent such distribution is otherwise includible in 

2 gross income (determined after the application of 

3 paragraph (4)). 

4 ‘‘(2) QUALIFIED HSA FUNDING DISTRIBU5 TION.—For purposes of this subsection, the term 

6 ‘qualified HSA funding distribution’ means a dis7 tribution from an individual retirement plan of the 

8 employee to the extent that such distribution is con9 tributed to the health savings account of the em10 ployee not later than the 60th day after the day on 

11 which the employee receives such distribution or in 

12 a direct trustee-to-trustee transfer. 

13 ‘‘(3) LIMITATIONS.— 

14 ‘‘(A) MAXIMUM DOLLAR LIMITATIONS

15 BASED ON OUT-OF POCKET LIMITS IN EFFECT

16 AT TIME OF CONTRIBUTION.—The amount ex17 cluded from gross income by paragraph (1) 

18 shall not exceed— 

19 ‘‘(i) in the case of an individual who 

20 has self-only coverage under a high deduct21 ible health plan as of the first day of the 

22 month in which the qualified HSA funding 

23 distribution is contributed to the health 

24 savings account of the employee, the 

25 amount in effect for the taxable year under 


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1 subclause (I) of section 223(c)(2)(A)(ii), 

2 and 

3 ‘‘(ii) in the case of an individual who 

4 has family coverage under a high deduct5 ible health plan as of the first day of the 

6 month in which the qualified HSA funding 

7 distribution is contributed to the health 

8 savings account of the employee, the 

9 amount in effect for the taxable year under 

10 subclause (II) of section 223(c)(2)(A)(ii). 

11 ‘‘(B) ONE-TIME TRANSFER.— 

12 ‘‘(i) IN GENERAL.—Except as pro13 vided in clause (ii), an individual may 

14 make an election under paragraph (1) only 

15 for one qualified HSA funding distribution 

16 during the lifetime of the individual. Such 

17 an election, once made, shall be irrev18 ocable. 

19 ‘‘(ii) CONVERSION FROM SELF-ONLY

20 TO FAMILY COVERAGE.—If a qualified 

21 HSA funding distribution is made during a 

22 month during which an individual has self23 only coverage under a high deductible 

24 health plan as of the first day of the 

25 month, the individual may elect to make 


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1 an additional qualified HSA funding dis2 tribution during a subsequent month dur3 ing which the individual has family cov4 erage under a high deductible health plan 

5 as of the first day of the subsequent 

6 month, except that the limitation otherwise 

7 applicable under subparagraph (A)(ii) to 

8 the distribution during such subsequent 

9 month shall be reduced by the amount of 

10 the earlier qualified HSA funding distribu11 tion. 

12 ‘‘(4) APPLICATION OF SECTION 72.—Notwith13 standing section 72, in determining the extent to 

14 which an amount is treated as includible in gross in15 come for purposes of paragraph (1), the aggregate 

16 amount distributed from an eligible retirement plan 

17 in a taxable year shall be treated as includible in 

18 gross income to the extent that such amount does 

19 not exceed the aggregate amount which would have 

20 been so includible if all amounts distributed from all 

21 eligible retirement plans were treated as 1 contract 

22 for purposes of determining the inclusion of such 

23 distribution under section 72. Proper adjustments 

24 shall be made in applying section 72 to other disVerDate Aug 31 2005 04:40 Jun 29, 2006 Jkt 049200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S3585.IS S3585

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1 tributions in such taxable year and subsequent tax2 able years. 

3 ‘‘(5) DEFINITIONS.—For purposes of this sub4 section— 

5 ‘‘(A) ELIGIBLE RETIREMENT PLAN.—The 

6 term ‘eligible retirement plan’ means an indi7 vidual retirement plan (as defined in section 

8 7701(a)(37)), including an individual retire9 ment plan which is designated as a Roth IRA. 

10 ‘‘(B) ELIGIBLE INDIVIDUAL.—The term 

11 ‘eligible individual’ has the meaning given such 

12 term by section 223(c)(1). 

13 ‘‘(6) RELATED PLANS TREATED AS 1.—For 

14 purposes of this subsection, all eligible retirement 

15 plans of an employer shall be treated as a single 

16 plan.’’. 

17 (2) COORDINATION WITH LIMITATION ON CON18 TRIBUTIONS TO HSAS.—Section 223(b)(4) (relating 

19 to coordination with other contributions) is amended 

20 by striking ‘‘and’’ at the end of subparagraph (A), 

21 by striking the period at the end of subparagraph 

22 (B) and inserting ‘‘, and’’, and by inserting after 

23 subparagraph (B) the following new subparagraph: 

24 ‘‘(C) the aggregate amount contributed to 

25 health savings accounts of such individual for 


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1 such taxable year under section 402(l) (and 

2 such amount shall not be allowed as a deduc3 tion under subsection (a)).’’. 

4 (3) 10-PERCENT PENALTY ON EARLY DISTRIBU5 TIONS NOT TO APPLY.—Section 72(t)(2)(A) of such 

6 Code (relating to subsection not to apply to certain 

7 distributions) is amended by striking ‘‘or’’ at the 

8 end of clause (vi), by striking the period at the end 

9 of clause (vii) and inserting ‘‘, or’’, and by inserting 

10 after clause (vii) the following new clause: 

11 ‘‘(viii) a qualified HSA funding dis12 tribution (as defined by section 402(l)).’’. 

13 (c) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to taxable years beginning after 

15 December 31, 2006. 

16 SEC. 4. PROVISIONS RELATING TO ELIGIBILITY TO CON17 TRIBUTE TO HSAS. 

18 (a) INDIVIDUALS ELIGIBLE FOR REIMBURSEMENT

19 UNDER SPOUSE’S FLEXIBLE SPENDING ARRANGE20 MENT.—Section 223(c)(1) (defining eligible individual) is 

21 amended by adding at the end the following new subpara22 graph: 

23 ‘‘(C) SPECIAL RULE FOR CERTAIN FLEXI24 BLE SPENDING ARRANGEMENTS.—For purposes 

25 of subparagraph (A)(ii), an individual shall not 


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1 be treated as covered under a health plan de2 scribed in such subparagraph merely because 

3 the individual is covered under a flexible spend4 ing arrangement (within the meaning of section 

5 106(c)(2)) which is maintained by an employer 

6 of the spouse of the individual, but only if— 

7 ‘‘(i) the employer is not also the em8 ployer of the individual, and 

9 ‘‘(ii) the individual certifies to the em10 ployer and to the Secretary (in such form 

11 and manner as the Secretary may pre12 scribe) that the individual and the individ13 ual’s spouse will not accept reimbursement 

14 under the arrangement for any expenses 

15 for medical care provided to the indi16 vidual.’’. 

17 (b) INDIVIDUALS OVER AGE 65 AUTOMATICALLY EN18 ROLLED IN MEDICARE PART A.—Section 223(b)(7) (re19 lating to contribution limitation on medicare eligible indi20 viduals) is amended by adding at the end the following 

21 new sentence: ‘‘This paragraph shall not apply to any indi22 vidual during any period the individual’s only entitlement 

23 to such benefits is an entitlement to hospital insurance 

24 benefits under part A of title XVIII of such Act pursuant 

25 to an automatic enrollment for such hospital insurance 


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1 benefits under the regulations under section 226(a)(1) of 

2 such Act.’’ 

3 (c) INDIVIDUALS ELIGIBLE FOR CERTAIN VETERANS

4 BENEFITS.—Section 223(c)(1) (defining eligible indi5 vidual), as amended by subsection (a), is amended by add6 ing at the end the following new subparagraph: 

7 ‘‘(D) SPECIAL RULE FOR INDIVIDUALS EL8 IGIBLE FOR CERTAIN VETERANS BENEFITS.— 

9 For purposes of subparagraph (A)(ii), an indi10 vidual shall not be treated as covered under a 

11 health plan described in such subparagraph 

12 merely because the individual receives periodic 

13 hospital care or medical services for a service14 connected disability under any law administered 

15 by the Secretary of Veterans Affairs but only if 

16 the individual is not eligible to receive such care 

17 or services for any condition other than a serv18 ice-connected disability.’’. 

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

20 this section shall apply to taxable years beginning after 

21 December 31, 2006. 

22 SEC. 5. PROVISIONS RELATING TO CONTRIBUTION AND 

23 LOW PREMIUM HEALTH PLAN LIMITS. 

24 (a) INCREASE IN CONTRIBUTION LIMITS FOR

25 HSAS.— 


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1 (1) INCREASE IN MONTHLY LIMIT.— 

2 (A) IN GENERAL.—Paragraph (2) of sec3 tion 223(b) (relating to monthly limitation) is 

4 amended to read as follows: 

5 ‘‘(2) MONTHLY LIMITATION.—In the case of an 

6 eligible individual who has coverage under a high de7 ductible health plan, the monthly limitation for any 

month of such coverage is 1 8 ⁄12 of— 

9 ‘‘(A) in the case of an eligible individual 

10 who has self-only coverage under a high deduct11 ible health plan as of the first day of such 

12 month, $2,700, and 

13 ‘‘(B) in the case of an eligible individual 

14 who has family coverage under a high deduct15 ible health plan as of the first day of such 

16 month, $5,450.’’. 

17 (B) CONFORMING AMENDMENTS.— 

18 (i) Section 223(d)(1)(A)(ii)(I) is 

19 amended by striking ‘‘subsection 

20 (b)(2)(B)(ii)’’ and inserting ‘‘subsection 

21 (b)(2)(B)’’. 

22 (ii) Section 223(c)(2)(D) is amended 

23 to read as follows: 

24 ‘‘(D) SPECIAL RULE FOR NETWORK

25 PLANS.—In the case of a plan using a network 


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1 of providers, such plan shall not fail to be treat2 ed as a high deductible health plan by reason 

3 of having an out-of-pocket limitation for serv4 ices provided outside of such network which ex5 ceeds the applicable limitation under subpara6 graph (A)(ii).’’. 

7 (2) INCREASE IN LIMIT FOR INDIVIDUALS BE8 COMING ELIGIBLE INDIVIDUALS AFTER THE BEGIN9 NING OF THE YEAR.—Section 223(b) (relating to 

10 limitations) is amended by adding at the end the fol11 lowing new paragraph: 

12 ‘‘(8) INCREASE IN LIMIT FOR INDIVIDUALS BE13 COMING ELIGIBLE INDIVIDUALS AFTER THE BEGIN14 NING OF THE YEAR.—An individual who first be15 comes an eligible individual during a calendar year 

16 in a month after January of the calendar year shall, 

17 for purposes of computing the limitation under para18 graph (1) for any taxable year, be treated as having 

19 been an eligible individual during each of the months 

20 in such calendar year preceding such first month 

21 (and as having been enrolled in each of those 

22 months in the same high deductible health plan the 

23 individual was enrolled in for such first month).’’. 

24 (3) APPLICATION OF SPECIAL RULES FOR MAR25 RIED INDIVIDUALS.—Paragraph (5) of section 


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1 223(b) (relating to special rule for married individ2 uals) is amended to read as follows: 

3 ‘‘(5) SPECIAL RULES FOR MARRIED INDIVID4 UALS.— 

5 ‘‘(A) IN GENERAL.—In the case of individ6 uals who are married to each other and who are 

7 both eligible individuals, the limitation under 

8 paragraph (1) for each spouse shall be equal to 

9 the spouse’s applicable share of the excess (if 

10 any) of— 

11 ‘‘(i) the dollar amount in effect under 

12 paragraph (2)(B) (without regard to any 

13 additional contribution amounts under 

14 paragraph (3)), over 

15 ‘‘(ii) the aggregate amount paid to 

16 Archer MSAs of such spouses for the tax17 able year. 

18 ‘‘(B) APPLICABLE SHARE.—For purposes 

19 of subparagraph (A), a spouse’s applicable 

20 share is one-half of the limitation under sub21 paragraph (A) unless both spouses agree on a 

22 different division.’’. 

23 (4) SELF-ONLY COVERAGE.—Section 223(c)(4) 

24 (defining family coverage) is amended to read as fol25 lows: 


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1 ‘‘(4) COVERAGE.— 

2 ‘‘(A) FAMILY COVERAGE.—The term ‘fam3 ily coverage’ means any coverage other than 

4 self-only coverage. 

5 ‘‘(B) SELF-ONLY COVERAGE.—If more 

6 than 1 individual is covered by a high deduct7 ible health plan but only 1 of the individuals is 

8 an eligible individual, the coverage shall be 

9 treated as self-only coverage.’’. 

10 (b) FAMILY PLAN MAY HAVE INDIVIDUAL ANNUAL

11 DEDUCTIBLE LIMIT.—Section 223(c)(2) (defining high 

12 deductible health plan) is amended by adding at the end 

13 the following new subparagraph: 

14 ‘‘(E) SPECIAL RULE FOR FAMILY COV15 ERAGE.—A health plan providing family cov16 erage shall not fail to meet the requirements of 

17 subparagraph (A)(i)(II) merely because the 

18 plan elects to provide both— 

19 ‘‘(i) an aggregate annual deductible 

20 limit for all individuals covered by the plan 

21 which is not less than the amount in effect 

22 under subparagraph (A)(i)(II), and 

23 ‘‘(ii) an annual deductible limit for 

24 each individual covered by the plan which 


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1 is not less than the amount in effect under 

2 subparagraph (A)(i)(I).’’. 

3 (c) COST-OF-LIVING ADJUSTMENTS COMPUTED EAR4 LIER IN THE CALENDAR YEAR.—Paragraph (1) of section 

5 223(g) (relating to cost-of-living adjustment) is amended 

6 by adding at the end the following new flush sentence: 

7 ‘‘In the case of any taxable year beginning after 

8 2006, section 1(f)(4) shall be applied for purposes of 

9 this paragraph by substituting ‘March 31’ for ‘Au10 gust 31’ and the Secretary shall publish the adjusted 

11 amounts under subsections (b)(2) and (c)(2)(A) for 

12 taxable years beginning in any calendar year no 

13 later than June 1 of the preceding calendar year.’’. 

14 (d) EFFECTIVE DATE.—The amendments made by 

15 this section shall apply to taxable years beginning after 

16 December 31, 2006. 

17 SEC. 6. DEFINITION OF QUALIFIED MEDICAL EXPENSES. 

18 (a) PREMIUMS FOR LOW PREMIUM HEALTH PLANS

19 TREATED AS QUALIFIED MEDICAL EXPENSES.—Sub20 paragraph (C) of section 223(d)(2) is amended by striking 

21 ‘‘or’’ at the end of clause (iii), by striking the period at 

22 the end of clause (iv) and inserting ‘‘, or’’, and by adding 

23 at the end the following new clause: 

24 ‘‘(v) a high deductible health plan, but 

25 only if the expenses are for coverage for a 


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1 month with respect to which the account 

2 beneficiary is an eligible individual by rea3 son of the coverage under the plan.’’. 

4 (b) SPECIAL RULE FOR CERTAIN MEDICAL EX5 PENSES INCURRED BEFORE ESTABLISHMENT OF AC6 COUNT.—Paragraph (2) of section 223(d) is amended by 

7 adding at the end the following new subparagraph: 

8 ‘‘(D) CERTAIN MEDICAL EXPENSES IN9 CURRED BEFORE ESTABLISHMENT OF ACCOUNT

10 TREATED AS QUALIFIED.—An expense shall not 

11 fail to be treated as a qualified medical expense 

12 solely because such expense was incurred before 

13 the establishment of the health savings account 

14 if such expense was incurred— 

15 ‘‘(i) during either— 

16 ‘‘(I) the taxable year in which the 

17 health savings account was estab18 lished, or 

19 ‘‘(II) the preceding taxable year 

20 in the case of a health savings ac21 count established after the taxable 

22 year in which such expense was in23 curred but before the time prescribed 

24 by law for filing the return for such 


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1 taxable year (not including extensions 

2 thereof), and 

3 ‘‘(ii) for medical care of an individual 

4 during a period that such individual was 

5 an eligible individual. 

6 For purposes of clause (ii), an individual shall 

7 be treated as an eligible individual for any por8 tion of a month the individual is described in 

9 subsection (c)(1), determined without regard to 

10 whether the individual is covered under a high 

11 deductible health plan on the 1st day of such 

12 month.’’. 

13 (c) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to taxable years beginning after 

15 December 31, 2006. 

Æ 


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