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[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 3585 Introduced in Senate (IS)]

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.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``HSA Improvement 
and Expansion Act of 2006''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. FINDINGS.

    The Congress finds the following:
            (1) The Medicare Prescription Drug, Improvement, and 
        Modernization Act of 2003 (Public Law 108-173) authorizes 
        health savings accounts (referred to in this section as 
        ``HSAs'') into which individuals may make annual contributions 
        of not more than $2,700, and families may make annual 
        contributions of not more than $5,450, to permit spending by 
        individuals for their health care needs.
            (2) Federal law provides for obtaining health insurance 
        coverage through a low premium health plan offered with a tax-
        favored HSA that typically costs substantially less than 
        traditional health insurance.
            (3) Giving individuals more direct control over their 
        health care spending will encourage more prudent use of health 
        care services, help make the health care system more responsive 
        to the needs of consumers, and improve access to health 
        coverage for the uninsured.
            (4) A broad range of improvements to the Federal laws 
        governing HSAs are necessary to make them more attractive to 
        consumers and employers.
            (5) The number of people covered in January 2006 by 
        products combining an HSA with a low premium health plan was 
        3,168,000, more than triple the 1,031,000 reported in March 
        2005.
            (6) HSAs have become an important option for consumers and 
        employers who have struggled to afford health insurance 
        coverage.
            (7) According to a January 2006 census, 31 percent of new 
        enrollees in HSAs and low premium health plans in the 
        individual market were previously uninsured.
            (8) HSAs combined with low premium health plans can provide 
        an affordable and accessible health insurance option for 
        individuals of all ages.
            (9) 50 percent of all people covered by HSAs and low 
        premium health plans in the individual market, including 
        dependents covered under family plans, are 40 years of age or 
        older.
            (10) Many States currently have in effect laws and 
        regulations that require insurers to provide specific benefit 
        coverage in the health insurance plans they offer, preventing 
        individuals and small business from enrolling in low premium 
        health plans and making them ineligible for HSAs.

SEC. 3. ACCELERATED FUNDING FOR HSAS THROUGH DISTRIBUTIONS FROM 
              BALANCES IN HEALTH REIMBURSEMENT AND FLEXIBLE SPENDING 
              ARRANGEMENTS AND FROM INDIVIDUAL RETIREMENT PLANS.

    (a) One-Time FSA and HRA Rollovers to HSAs.--
            (1) In general.--A plan shall not fail to be treated as a 
        flexible spending arrangement or health reimbursement 
        arrangement under section 105 or 106 of the Internal Revenue 
        Code of 1986 merely because--
                    (A) such plan provides for a contribution to the 
                health savings account (as defined in section 223 of 
                such Code) of the employee which meets the requirements 
                of paragraph (2), and
                    (B) such plan thereafter terminates with respect to 
                such employee.
            (2) Requirements.--A contribution meets the requirements of 
        this paragraph if--
                    (A) in the case of a flexible spending arrangement 
                (as defined in section 106(c)(2) of such Code) in 
                existence on June 1, 2006, such contribution is the 
                remaining balance in such arrangement as of the last 
                day of the plan year ending in or before the taxable 
                year in which such contribution is made,
                    (B) in the case of a health reimbursement 
                arrangement in existence on June 1, 2006, such 
                contribution is the remaining balance of the amount to 
                be received in reimbursements under such arrangement as 
                of the last day of the plan year ending in or before 
                the taxable year in which such contribution is made, 
                and
                    (C) such contribution is made by the employer 
                directly to the health savings account of the employee 
                not later than 60 days after the end of the plan year 
                of such flexible spending arrangement or health 
                reimbursement arrangement.
            (3) Treatment as rollover contribution.--For purposes of 
        sections 223 and 4973 of such Code, a contribution which meets 
        the requirements of paragraph (2) shall be treated as a 
        rollover contribution described in section 223(f)(5) of such 
        Code.
            (4) Tax treatment relating to contributions.--For purposes 
        of this title--
                    (A) Income tax.--Gross income shall not include the 
                amount of any contribution under this subsection.
                    (B) Employment taxes.--Amounts contributed to a 
                health savings account under this subsection shall be 
                treated as a payment described in section 106(d) of 
                such Code.
                    (C) Comparability excise tax.--Section 4980G of 
                such Code shall not apply to contributions made under 
                this subsection.
            (5) Termination.--This paragraph shall not apply to any 
        taxable year beginning after December 31, 2011.
    (b) One-Time Distribution From Individual Retirement Plans to Fund 
HSAs.--
            (1) In general.--Section 402 (relating to taxability of 
        beneficiary of employees' trust) is amended by adding at the 
        end the following new subsection:
    ``(l) Health Savings Account Funding Distribution From Individual 
Retirement Plans.--
            ``(1) In general.--In the case of an employee who is an 
        eligible individual and who elects the application of this 
        subsection for a taxable year, gross income of the employee for 
        the taxable year does not include a qualified HSA funding 
        distribution to the extent such distribution is otherwise 
        includible in gross income (determined after the application of 
        paragraph (4)).
            ``(2) Qualified hsa funding distribution.--For purposes of 
        this subsection, the term `qualified HSA funding distribution' 
        means a distribution from an individual retirement plan of the 
        employee to the extent that such distribution is contributed to 
        the health savings account of the employee not later than the 
        60th day after the day on which the employee receives such 
        distribution or in a direct trustee-to-trustee transfer.
            ``(3) Limitations.--
                    ``(A) Maximum dollar limitations based on out-of 
                pocket limits in effect at time of contribution.--The 
                amount excluded from gross income by paragraph (1) 
                shall not exceed--
                            ``(i) in the case of an individual who has 
                        self-only coverage under a high deductible 
                        health plan as of the first day of the month in 
                        which the qualified HSA funding distribution is 
                        contributed to the health savings account of 
                        the employee, the amount in effect for the 
                        taxable year under subclause (I) of section 
                        223(c)(2)(A)(ii), and
                            ``(ii) in the case of an individual who has 
                        family coverage under a high deductible health 
                        plan as of the first day of the month in which 
                        the qualified HSA funding distribution is 
                        contributed to the health savings account of 
                        the employee, the amount in effect for the 
                        taxable year under subclause (II) of section 
                        223(c)(2)(A)(ii).
                    ``(B) One-time transfer.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), an individual may make an election 
                        under paragraph (1) only for one qualified HSA 
                        funding distribution during the lifetime of the 
                        individual. Such an election, once made, shall 
                        be irrevocable.
                            ``(ii) Conversion from self-only to family 
                        coverage.--If a qualified HSA funding 
                        distribution is made during a month during 
                        which an individual has self-only coverage 
                        under a high deductible health plan as of the 
                        first day of the month, the individual may 
                        elect to make an additional qualified HSA 
                        funding distribution during a subsequent month 
                        during which the individual has family coverage 
                        under a high deductible health plan as of the 
                        first day of the subsequent month, except that 
                        the limitation otherwise applicable under 
                        subparagraph (A)(ii) to the distribution during 
                        such subsequent month shall be reduced by the 
                        amount of the earlier qualified HSA funding 
                        distribution.
            ``(4) Application of section 72.--Notwithstanding section 
        72, in determining the extent to which an amount is treated as 
        includible in gross income for purposes of paragraph (1), the 
        aggregate amount distributed from an eligible retirement plan 
        in a taxable year shall be treated as includible in gross 
        income to the extent that such amount does not exceed the 
        aggregate amount which would have been so includible if all 
        amounts distributed from all eligible retirement plans were 
        treated as 1 contract for purposes of determining the inclusion 
        of such distribution under section 72. Proper adjustments shall 
        be made in applying section 72 to other distributions in such 
        taxable year and subsequent taxable years.
            ``(5) Definitions.--For purposes of this subsection--
                    ``(A) Eligible retirement plan.--The term `eligible 
                retirement plan' means an individual retirement plan 
                (as defined in section 7701(a)(37)), including an 
                individual retirement plan which is designated as a 
                Roth IRA.
                    ``(B) Eligible individual.--The term `eligible 
                individual' has the meaning given such term by section 
                223(c)(1).
            ``(6) Related plans treated as 1.--For purposes of this 
        subsection, all eligible retirement plans of an employer shall 
        be treated as a single plan.''.
            (2) Coordination with limitation on contributions to 
        hsas.--Section 223(b)(4) (relating to coordination with other 
        contributions) is amended by striking ``and'' at the end of 
        subparagraph (A), by striking the period at the end of 
        subparagraph (B) and inserting ``, and'', and by inserting 
        after subparagraph (B) the following new subparagraph:
                    ``(C) the aggregate amount contributed to health 
                savings accounts of such individual for such taxable 
                year under section 402(l) (and such amount shall not be 
                allowed as a deduction under subsection (a)).''.
            (3) 10-percent penalty on early distributions not to 
        apply.--Section 72(t)(2)(A) of such Code (relating to 
        subsection not to apply to certain distributions) is amended by 
        striking ``or'' at the end of clause (vi), by striking the 
        period at the end of clause (vii) and inserting ``, or'', and 
        by inserting after clause (vii) the following new clause:
                            ``(viii) a qualified HSA funding 
                        distribution (as defined by section 402(l)).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 4. PROVISIONS RELATING TO ELIGIBILITY TO CONTRIBUTE TO HSAS.

    (a) Individuals Eligible for Reimbursement Under Spouse's Flexible 
Spending Arrangement.--Section 223(c)(1) (defining eligible individual) 
is amended by adding at the end the following new subparagraph:
                    ``(C) Special rule for certain flexible spending 
                arrangements.--For purposes of subparagraph (A)(ii), an 
                individual shall not be treated as covered under a 
                health plan described in such subparagraph merely 
                because the individual is covered under a flexible 
                spending arrangement (within the meaning of section 
                106(c)(2)) which is maintained by an employer of the 
                spouse of the individual, but only if--
                            ``(i) the employer is not also the employer 
                        of the individual, and
                            ``(ii) the individual certifies to the 
                        employer and to the Secretary (in such form and 
                        manner as the Secretary may prescribe) that the 
                        individual and the individual's spouse will not 
                        accept reimbursement under the arrangement for 
                        any expenses for medical care provided to the 
                        individual.''.
    (b) Individuals Over Age 65 Automatically Enrolled in Medicare Part 
A.--Section 223(b)(7) (relating to contribution limitation on medicare 
eligible individuals) is amended by adding at the end the following new 
sentence: ``This paragraph shall not apply to any individual during any 
period the individual's only entitlement to such benefits is an 
entitlement to hospital insurance benefits under part A of title XVIII 
of such Act pursuant to an automatic enrollment for such hospital 
insurance benefits under the regulations under section 226(a)(1) of 
such Act.''
    (c) Individuals Eligible for Certain Veterans Benefits.--Section 
223(c)(1) (defining eligible individual), as amended by subsection (a), 
is amended by adding at the end the following new subparagraph:
                    ``(D) Special rule for individuals eligible for 
                certain veterans benefits.--For purposes of 
                subparagraph (A)(ii), an individual shall not be 
                treated as covered under a health plan described in 
                such subparagraph merely because the individual 
                receives periodic hospital care or medical services for 
                a service-connected disability under any law 
                administered by the Secretary of Veterans Affairs but 
                only if the individual is not eligible to receive such 
                care or services for any condition other than a 
                service-connected disability.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 5. PROVISIONS RELATING TO CONTRIBUTION AND LOW PREMIUM HEALTH PLAN 
              LIMITS.

    (a) Increase in Contribution Limits for HSAs.--
            (1) Increase in monthly limit.--
                    (A) In general.--Paragraph (2) of section 223(b) 
                (relating to monthly limitation) is amended to read as 
                follows:
            ``(2) Monthly limitation.--In the case of an eligible 
        individual who has coverage under a high deductible health 
        plan, the monthly limitation for any month of such coverage is 
        \1/12\ of--
                    ``(A) in the case of an eligible individual who has 
                self-only coverage under a high deductible health plan 
                as of the first day of such month, $2,700, and
                    ``(B) in the case of an eligible individual who has 
                family coverage under a high deductible health plan as 
                of the first day of such month, $5,450.''.
                    (B) Conforming amendments.--
                            (i) Section 223(d)(1)(A)(ii)(I) is amended 
                        by striking ``subsection (b)(2)(B)(ii)'' and 
                        inserting ``subsection (b)(2)(B)''.
                            (ii) Section 223(c)(2)(D) is amended to 
                        read as follows:
                    ``(D) Special rule for network plans.--In the case 
                of a plan using a network of providers, such plan shall 
                not fail to be treated as a high deductible health plan 
                by reason of having an out-of-pocket limitation for 
                services provided outside of such network which exceeds 
                the applicable limitation under subparagraph 
                (A)(ii).''.
            (2) Increase in limit for individuals becoming eligible 
        individuals after the beginning of the year.--Section 223(b) 
        (relating to limitations) is amended by adding at the end the 
        following new paragraph:
            ``(8) Increase in limit for individuals becoming eligible 
        individuals after the beginning of the year.--An individual who 
        first becomes an eligible individual during a calendar year in 
        a month after January of the calendar year shall, for purposes 
        of computing the limitation under paragraph (1) for any taxable 
        year, be treated as having been an eligible individual during 
        each of the months in such calendar year preceding such first 
        month (and as having been enrolled in each of those months in 
        the same high deductible health plan the individual was 
        enrolled in for such first month).''.
            (3) Application of special rules for married individuals.--
        Paragraph (5) of section 223(b) (relating to special rule for 
        married individuals) is amended to read as follows:
            ``(5) Special rules for married individuals.--
                    ``(A) In general.--In the case of individuals who 
                are married to each other and who are both eligible 
                individuals, the limitation under paragraph (1) for 
                each spouse shall be equal to the spouse's applicable 
                share of the excess (if any) of--
                            ``(i) the dollar amount in effect under 
                        paragraph (2)(B) (without regard to any 
                        additional contribution amounts under paragraph 
                        (3)), over
                            ``(ii) the aggregate amount paid to Archer 
                        MSAs of such spouses for the taxable year.
                    ``(B) Applicable share.--For purposes of 
                subparagraph (A), a spouse's applicable share is one-
                half of the limitation under subparagraph (A) unless 
                both spouses agree on a different division.''.
            (4) Self-only coverage.--Section 223(c)(4) (defining family 
        coverage) is amended to read as follows:
            ``(4) Coverage.--
                    ``(A) Family coverage.--The term `family coverage' 
                means any coverage other than self-only coverage.
                    ``(B) Self-only coverage.--If more than 1 
                individual is covered by a high deductible health plan 
                but only 1 of the individuals is an eligible 
                individual, the coverage shall be treated as self-only 
                coverage.''.
    (b) Family Plan May Have Individual Annual Deductible Limit.--
Section 223(c)(2) (defining high deductible health plan) is amended by 
adding at the end the following new subparagraph:
                    ``(E) Special rule for family coverage.--A health 
                plan providing family coverage shall not fail to meet 
                the requirements of subparagraph (A)(i)(II) merely 
                because the plan elects to provide both--
                            ``(i) an aggregate annual deductible limit 
                        for all individuals covered by the plan which 
                        is not less than the amount in effect under 
                        subparagraph (A)(i)(II), and
                            ``(ii) an annual deductible limit for each 
                        individual covered by the plan which is not 
                        less than the amount in effect under 
                        subparagraph (A)(i)(I).''.
    (c) Cost-of-Living Adjustments Computed Earlier in the Calendar 
Year.--Paragraph (1) of section 223(g) (relating to cost-of-living 
adjustment) is amended by adding at the end the following new flush 
sentence:
        ``In the case of any taxable year beginning after 2006, section 
        1(f)(4) shall be applied for purposes of this paragraph by 
        substituting `March 31' for `August 31' and the Secretary shall 
        publish the adjusted amounts under subsections (b)(2) and 
        (c)(2)(A) for taxable years beginning in any calendar year no 
        later than June 1 of the preceding calendar year.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 6. DEFINITION OF QUALIFIED MEDICAL EXPENSES.

    (a) Premiums for Low Premium Health Plans Treated as Qualified 
Medical Expenses.--Subparagraph (C) of section 223(d)(2) is amended by 
striking ``or'' at the end of clause (iii), by striking the period at 
the end of clause (iv) and inserting ``, or'', and by adding at the end 
the following new clause:
                            ``(v) a high deductible health plan, but 
                        only if the expenses are for coverage for a 
                        month with respect to which the account 
                        beneficiary is an eligible individual by reason 
                        of the coverage under the plan.''.
    (b) Special Rule for Certain Medical Expenses Incurred Before 
Establishment of Account.--Paragraph (2) of section 223(d) is amended 
by adding at the end the following new subparagraph:
                    ``(D) Certain medical expenses incurred before 
                establishment of account treated as qualified.--An 
                expense shall not fail to be treated as a qualified 
                medical expense solely because such expense was 
                incurred before the establishment of the health savings 
                account if such expense was incurred--
                            ``(i) during either--
                                    ``(I) the taxable year in which the 
                                health savings account was established, 
                                or
                                    ``(II) the preceding taxable year 
                                in the case of a health savings account 
                                established after the taxable year in 
                                which such expense was incurred but 
                                before the time prescribed by law for 
                                filing the return for such taxable year 
                                (not including extensions thereof), and
                            ``(ii) for medical care of an individual 
                        during a period that such individual was an 
                        eligible individual.
                For purposes of clause (ii), an individual shall be 
                treated as an eligible individual for any portion of a 
                month the individual is described in subsection (c)(1), 
                determined without regard to whether the individual is 
                covered under a high deductible health plan on the 1st 
                day of such month.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.
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