I
104TH CONGRESS
1ST SESSION
H. R. 323
To amend the Internal Revenue Code of 1986 to allow a deduction for
contributions to a medical savings account, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 4, 1995
Mr. MCINTOSH 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 a
deduction for contributions to a medical savings account,
and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Health Care Savings
Plan Act of 1995’’.
TITLE I—MEDICAL SAVINGS
ACCOUNTS
SEC. 101. MEDICAL SAVINGS ACCOUNTS.
(a) IN GENERAL.—Part VII of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
additional itemized deductions for individuals) is amended
by redesignating section 220 as section 221 and by insert-
ing after section 219 the following new section:
‘‘SEC. 220. MEDICAL SAVINGS ACCOUNTS.
‘‘(a) DEDUCTION ALLOWED.—In the case of an eligi-
ble individual, there shall be allowed as a deduction
amounts paid in cash during the taxable year by or on
behalf of such individual to a medical savings account.
‘‘(b) LIMITATION.—
‘‘(1) IN GENERAL.—The amount allowable as a
deduction under subsection (a) to an individual for
the taxable year shall not exceed the excess (if any)
of—
‘‘(A) the lesser of—
‘‘(i) the applicable limit, or
‘‘(ii) the compensation (as defined in
section 219(f)) includible in the individ-
ual’s gross income for the taxable year,
over
‘‘(B) the sum of—
‘‘(i) the value of employer-provided
coverage for the medical expenses of such
individual,
‘‘(ii) the amount paid by the individ-
ual (other than from amounts distributed
from a medical savings account) for cov-
erage under qualified catastrophic coverage
health plan for coverage for such individ-
ual, the spouse of such individual, and de-
pendents (as defined in section 152) of
such individual, plus
‘‘(iii) the aggregate amount contrib-
uted to such account during the taxable
year pursuant to section 125(d)(3).
‘‘(2) APPLICABLE
LIMIT.—For purposes of
paragraph (1), the applicable limit is the sum of—
‘‘(A) $4,800, plus
‘‘(B) $600 for each individual who is a de-
pendent (as defined in section 152) of the indi-
vidual for whose benefit the account is estab-
lished.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) MEDICAL SAVINGS ACCOUNT.—The term
‘medical savings account’ means a trust created or
organized in the United States exclusively for the
purpose of paying the qualified medical expenses of
the individual for whose benefit the trust is estab-
lished, but only if the written governing instrument
creating the trust meets the following requirements:
‘‘(A) No contribution will be accepted un-
less it is in cash and contributions will not be
accepted for any taxable year in excess of the
applicable limit (as defined in subsection
(b)(2)).
‘‘(B) The trustee is a bank (as defined in
section 408(n)) or another person who dem-
onstrates to the satisfaction of the Secretary
that the manner in which such person will ad-
minister the trust will be consistent with the re-
quirements of this section.
‘‘(C) No part of the trust assets will be in-
vested in life insurance contracts.
‘‘(D) The assets of the trust will not be
commingled with other property except in a
common trust fund or common investment
fund.
‘‘(2) ELIGIBLE INDIVIDUAL.—The term ‘eligible
individual’ means any individual if—
‘‘(A) such individual is not covered by any
employer-provided group health plan, or
‘‘(B) such individual is covered by an em-
ployer-provided group health plan which is a
qualified catastrophic coverage health plan and
is not covered by any other health plan.
‘‘(3) QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
medical expenses’ means medical expenses other
than amounts paid for a health plan which is
not a qualified catastrophic coverage health
plan.
‘‘(B) MEDICAL
EXPENSES.—The term
‘medical expenses’ means amounts paid by the
individual for whose benefit the account was es-
tablished for medical care (as defined in section
213) of such individual, the spouse of such indi-
vidual, and any dependent (as defined in section
152) of such individual, but only to the extent
such amounts are not compensated for by in-
surance or otherwise.
‘‘(4) QUALIFIED
CATASTROPHIC
COVERAGE
HEALTH
PLAN.—The term ‘qualified catastrophic
coverage health plan’ means any health plan which
is certified by the Secretary of Health and Human
Services as a plan—
‘‘(A) which provides no compensation for
medical expenses not exceeding $1,500 during
any year,
‘‘(5) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—A taxpayer shall be deemed to have made a
contribution on the last day of the preceding taxable
year if the contribution is made on account of such
taxable year and is made not later than the time
prescribed by law for filing the return for such tax-
able year (not including extensions thereof).
‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, any amount paid or distrib-
uted out of a medical savings account shall be in-
cluded in the gross income of the individual for
whose benefit such account was established unless
such amount is used exclusively to pay the qualified
medical expenses of such individual.
‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—Paragraph (1) shall
not apply to the distribution of any contribution paid
during a taxable year to a medical savings account
to the extent that such contribution exceeds the
amount allowable as a deduction under subsection
(a) if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such individual’s return
for such taxable year,
‘‘(B) no deduction is allowed under sub-
section (a) with respect to such excess contribu-
tion, and
‘‘(C) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (C) shall
be included in the gross income of the individual for
the taxable year in which it is received.
‘‘(e) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) ACCOUNT TAXED AS GRANTOR TRUST.—
‘‘(A) IN
GENERAL.—The individual for
whose benefit a medical savings account is es-
tablished shall be treated for purposes of this
title as the owner thereof and shall be subject
to tax thereon in accordance with subpart E of
part I of subchapter J of this chapter (relating
to grantors and others treated as substantial
owners).
‘‘(B) EXCLUSION
FROM
GROSS
INCOME
FOR $300 OF EARNINGS.—Notwithstanding sub-
paragraph (A), an amount shall be includible in
the gross income of an individual for a taxable
year by reason of subparagraph (A) only to the
extent such amount exceeds $300.
‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE
INDIVIDUAL
ENGAGES
IN
PROHIBITED
TRANS-
ACTION.—
‘‘(A) IN GENERAL.—If, during any taxable
year of the individual for whose benefit the
medical savings account was established, such
individual engages in any transaction prohibited
by section 4975 with respect to the account, the
account ceases to be a medical savings account
as of the first day of that taxable year.
‘‘(B) ACCOUNT TREATED AS DISTRIBUTING
ALL ITS ASSETS.—In any case in which any ac-
count ceases to be a medical savings account by
reason of subparagraph (A) on the first day of
any taxable year, paragraph (1) of subsection
(d) applies as if there were a distribution on
such first day in an amount equal to the fair
market value (on such first day) of all assets in
the account (on such first day).
‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU-
RITY.—If, during any taxable year, the individual for
whose benefit a medical savings account was estab-
lished uses the account or any portion thereof as se-
curity for a loan, the portion so used is treated as
distributed to that individual.
‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN-
CLUDED IN GROSS INCOME.—
‘‘(1) DISTRIBUTION NOT USED FOR QUALIFIED
MEDICAL EXPENSES.—If a distribution from a medi-
cal savings account is made, and not used to pay the
qualified medical expenses of the individual for
whose benefit the account was established, the tax li-
ability of such individual for the taxable year in
which such distribution is received shall be increased
by an amount equal to 10 percent of the amount of
the distribution which is includible in gross income
for such taxable year.
‘‘(2) DISQUALIFICATION CASES.—If an amount
is includible in the gross income of an individual for
a taxable year under subsection (e), his tax under
this chapter for such taxable year shall be increased
by an amount equal to 10 percent of such amount
includible in his gross income.
‘‘(3) PENALTY-FREE
WITHDRAWALS
TO
EX-
TENT AMOUNTS IN ACCOUNT EXCEED $15,000.—
‘‘(A) IN
GENERAL.—Paragraph (1), and
paragraph (2) to the extent it relates to sub-
section (e)(3), shall not apply to the extent that
the sum of—
‘‘(i) the amount remaining in the
medical savings accounts of such individual
immediately after the distribution, plus
‘‘(ii) the amount remaining at such
time in the medical savings accounts of the
spouse (if any) of such individual,
has a value at such time is at least $15,000.
‘‘(B) LOWER LIMIT FOR INDIVIDUALS AT-
TAINING SOCIAL SECURITY RETIREMENT AGE.—
The $15,000 amount in subparagraph (A) shall
be reduced by $1,000 for each year by which
the age (as of the close of the taxable year) of
the individual for whose benefit the account was
established exceeds retirement age (as defined
in section 216(l) of the Social Security Act).
‘‘(4) DISABILITY
OR
DEATH
CASES.—Para-
graphs (1) and (2) do not apply if the payment or
distribution is made after the individual for whose
benefit the medical savings account was established
becomes disabled within the meaning of section
72(m)(7) or dies.
‘‘(g) SPECIAL RULES.—
‘‘(1) COMMUNITY PROPERTY LAWS.—This sec-
tion shall be applied without regard to any commu-
nity property laws.
‘‘(2) CUSTODIAL ACCOUNTS.—For purposes of
this section, a custodial account shall be treated as
a trust if—
‘‘(A) the assets of such account are held by
a bank (as defined in section 408(n)) or an-
other person who demonstrates to the satisfac-
tion of the Secretary that the manner in which
he will administer the account will be consistent
with the requirements of this section, and
‘‘(B) the custodial account would, except
for the fact that it is not a trust, constitute a
medical savings account described in subsection
(c).
For purposes of this title, in the case of a custodial
account treated as a trust by reason of the preceding
sentence, the custodian of such account shall be
treated as the trustee thereof.
‘‘(3) DENIAL
OF
DEDUCTIONS.—No amount
paid or distributed from a medical savings account
shall be taken into account in determining the de-
duction provided by section 213.
‘‘(h) INFLATION ADJUSTMENT.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1995, each
applicable dollar amount shall be increased by an
amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment for the
calendar year in which the taxable year begins.
‘‘(2) COST-OF-LIVING ADJUSTMENT.—For pur-
poses of paragraph (1), the cost-of-living adjustment
for any calendar year is the percentage (if any) by
which—
‘‘(A) the deemed average total wages (as
defined in section 209(k) of the Social Security
Act) for the preceding calendar year, exceeds
‘‘(B) the deemed average total wages (as
so defined) for calendar year 1994.
‘‘(3) APPLICABLE DOLLAR AMOUNT.—For pur-
poses of paragraph (1), the term ‘applicable dollar
amount’ means—
‘‘(A) the $4,800 and $600 amounts in sub-
section (b),
‘‘(B) the $1,500 amounts in subsection
(c)(4),
‘‘(C) the $300 amount in subsection (e)(1),
and
‘‘(D) the $15,000 amount in subsection
(f)(3).
‘‘(4) ROUNDING.—If any amount as adjusted
under paragraph (1) is not a multiple of $10, such
amount shall be rounded to the nearest multiple of
$10 (or, if such amount is a multiple of $5 and not
of $10, such amount shall be rounded to the next
highest multiple of $10).
‘‘(i) REPORTS.—The trustee of a medical savings ac-
count shall make such reports regarding such account to
the Secretary and to the individual for whose benefit the
account is maintained with respect to contributions, dis-
tributions, and such other matters as the Secretary may
require under regulations. The reports required by this
subsection shall be filed at such time and in such manner
and furnished to such individuals at such time and in such
manner as may be required by those regulations.’’
(b) DEDUCTION ALLOWED
IN ARRIVING
AT AD-
JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)
of such Code (relating to retirement savings) is amend-
ed—
(1) by inserting ‘‘OR MEDICAL EXPENSE’’ after
‘‘RETIREMENT’’ in the heading of such paragraph,
and
(2) by inserting before the period at the end
thereof the following: ‘‘and the deduction allowed by
section 220 (relating to deduction of certain pay-
ments to medical savings accounts)’’.
(c) EXCLUSION OF EMPLOYER CONTRIBUTIONS TO
MEDICAL
SAVINGS
ACCOUNTS
FROM
EMPLOYMENT
TAXES.—
(1) SOCIAL SECURITY TAXES.—
(A) Subsection (a) of section 3121 of such
Code is amended by striking ‘‘or’’ at the end of
paragraph (20), by striking the period at the
end of paragraph (21) and inserting ‘‘; or’’, and
by inserting after paragraph (21) the following
new paragraph:
‘‘(22) remuneration paid to or on behalf of
an employee if (and to the extent that) at the
time of payment of such remuneration it is rea-
sonable to believe that a corresponding deduc-
tion is allowable under section 220.’’
(B) Subsection (a) of section 209 of the
Social Security Act is amended by striking ‘‘or’’
at the end of paragraph (17), by striking the
period at the end of paragraph (18) and insert-
ing ‘‘; or’’, and by inserting after paragraph
(18) the following new paragraph:
‘‘(19) remuneration paid to or on behalf of an
employee if (and to the extent that) at the time of