‘‘(f) DEFINITIONS.—Terms used in this section which 
are also used in section 223 have the respective meanings 
given such terms in section 223.’’. 
(B) CLERICAL AMENDMENT.—The table of 
sections for chapter 43 of such Code is amend-
ed by adding after the item relating to section 
4980F the following new item:
‘‘Sec. 4980G. Failure of employer to make comparable health savings account 
contributions.’’.
(e) TAX ON EXCESS CONTRIBUTIONS.—Section 4973 
of such Code (relating to tax on excess contributions to 
certain tax-favored accounts and annuities) is amended—
(1) by striking ‘‘or’’ at the end of paragraph 
(3) of subsection (a), 
(2) by inserting ‘‘or’’ at the end of paragraph 
(4) of subsection (a), 
(3) by inserting after paragraph (4) of sub-
section (a) the following new paragraph: 
‘‘(5) a health savings account (within the mean-
ing of section 223(d)),’’, and 
(4) by adding at the end the following new sub-
section: 
‘‘(g) EXCESS CONTRIBUTIONS TO HEALTH SAVINGS 
ACCOUNTS.—For purposes of this section, in the case of 
health savings accounts (within the meaning of section
223(d)), the term ‘excess contributions’ means the sum 
of—
‘‘(1) the aggregate amount contributed for the 
taxable year to the accounts (other than rollover 
contributions referred to in section 223(f)(3)) which 
is neither excludable from gross income under sec-
tion 106(d) nor allowable as a deduction under sec-
tion 223 for such year, and 
‘‘(2) the amount determined under this sub-
section for the preceding taxable year, reduced by 
the sum of—
‘‘(A) the distributions out of the accounts 
which were included in gross income under sec-
tion 223(f)(2), and 
‘‘(B) the excess (if any) of—
‘‘(i) the maximum amount allowable 
as a deduction under section 223(b)(1) 
(determined without regard to section 
106(d)) for the taxable year, over 
‘‘(ii) the amount contributed to the 
accounts for the taxable year. 
For purposes of this subsection, any contribution which 
is distributed out of the health savings account in a dis-
tribution to which section 223(f)(3) applies shall be treat-
ed as an amount not contributed.’’.
(f) TAX ON PROHIBITED TRANSACTIONS.—
(1) Section 4975 of such Code (relating to tax 
on prohibited transactions) is amended by adding at 
the end of subsection (c) the following new para-
graph: 
‘‘(6) SPECIAL RULE FOR HEALTH SAVINGS AC-
COUNTS.—An individual for whose benefit a health 
savings account (within the meaning of section 
223(d)) is established shall be exempt from the tax 
imposed by this section with respect to any trans-
action concerning such account (which would other-
wise be taxable under this section) if, with respect 
to such transaction, the account ceases to be a 
health savings account by reason of the application 
of section 223(e)(2) to such account.’’. 
(2) Paragraph (1) of section 4975(e) of such 
Code is amended by redesignating subparagraphs 
(E) and (F) as subparagraphs (F) and (G), respec-
tively, and by inserting after subparagraph (D) the 
following new subparagraph: 
‘‘(E) a health savings account described in 
section 223(d),’’. 
(g) FAILURE TO PROVIDE REPORTS ON HEALTH 
SAVINGS ACCOUNTS.—Paragraph (2) of section 6693(a) 
of such Code (relating to reports) is amended by redesig-
nating subparagraphs (C) and (D) as subparagraphs (D) 
and (E), respectively, and by inserting after subparagraph 
(B) the following new subparagraph: 
‘‘(C) section 223(h) (relating to health sav-
ings accounts),’’. 
(h) EXCEPTION FROM CAPITALIZATION OF POLICY 
ACQUISITION EXPENSES.—Subparagraph (B) of section 
848(e)(1) of such Code (defining specified insurance con-
tract) is amended by striking ‘‘and’’ at the end of clause 
(iii), by striking the period at the end of clause (iv) and 
inserting ‘‘, and’’, and by adding at the end the following 
new clause: 
‘‘(v) any contract which is a health 
savings account (as defined in section 
223(d)).’’. 
(i) CLERICAL AMENDMENT.—The table of sections 
for part VII of subchapter B of chapter 1 of such Code 
is amended by striking the last item and inserting the fol-
lowing:
‘‘Sec. 223. Medical savings accounts. 
‘‘Sec. 224. Cross reference.’’.
(j) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
SEC. 3. DISPOSITION OF UNUSED HEALTH BENEFITS IN 
CAFETERIA PLANS AND FLEXIBLE SPENDING 
ARRANGEMENTS. 
(a) IN GENERAL.—Section 125 of the Internal Rev-
enue Code of 1986 (relating to cafeteria plans) is amended 
by redesignating subsections (h) and (i) as subsections (i) 
and (j), respectively, and by inserting after subsection (g) 
the following: 
‘‘(h) CONTRIBUTIONS OF CERTAIN UNUSED HEALTH 
BENEFITS.—
‘‘(1) IN GENERAL.—For purposes of this title, 
a plan or other arrangement shall not fail to be 
treated as a cafeteria plan solely because qualified 
benefits under such plan include a health flexible 
spending arrangement under which not more than 
$500 of unused health benefits may be—
‘‘(A) carried forward to the succeeding 
plan year of such health flexible spending ar-
rangement, or 
‘‘(B) contributed on behalf of an employee 
to a qualified retirement plan (as defined in 
section 4974(c)), an eligible deferred compensa-
tion plan (as defined in section 457(b)), or a 
health savings account (as defined in section 
223(d)).
‘‘(2) CONTRIBUTION OF UNUSED HEALTH BEN-
EFITS ON BEHALF OF EMPLOYEE.—For purposes of 
this title, contributions on behalf of an employee de-
scribed in paragraph (1) shall be treated as elective 
contributions made pursuant to a choice by the em-
ployee between such contributions and compensation 
which would otherwise be includible in the gross in-
come of the employee. Contributions described in 
paragraph (1) shall be excluded from the gross in-
come of the employee, or included in the gross in-
come of the employee and allowed as a deduction by 
the employee, to the extent that elective contribu-
tions would be treated in that manner under this 
title. 
‘‘(3) HEALTH FLEXIBLE SPENDING ARRANGE-
MENT.—For purposes of this subsection, the term 
‘health flexible spending arrangement’ means a flexi-
ble spending arrangement (as defined in section 
106(c)) that is a qualified benefit and only permits 
reimbursement for expenses for medical care (as de-
fined in section 213(d)(1) (without regard to sub-
paragraphs (C) and (D) thereof)). 
‘‘(4) UNUSED
HEALTH
BENEFITS.—For pur-
poses of this subsection, with respect to an em-
ployee, the term ‘unused health benefits’ means the 
excess of—
‘‘(A) the maximum amount of reimburse-
ment allowable to the employee during a plan 
year under a health flexible spending arrange-
ment, taking into account any election by the 
employee, over 
‘‘(B) the actual amount of reimbursement 
during such year under such arrangement.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003.
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