‘‘(i) the sum of the monthly limita-
tions for coverage months during such tax-
able year for each individual referred to in
paragraph (1), or
‘‘(ii) $3,000.
‘‘(B) MONTHLY LIMITATION.—
‘‘(i) IN GENERAL.—The monthly limi-
tation for an individual for each coverage
month of such individual during the tax-
able year is the amount equal to 1⁄12 of—
‘‘(I) $1,000 if such individual is
the taxpayer,
‘‘(II) $1,000 if—
‘‘(aa) such individual is the
spouse of the taxpayer,
‘‘(bb) the taxpayer and such
spouse are married as of the first
day of such month, and
‘‘(cc) the taxpayer files a
joint return for the taxable year,
and
‘‘(III) $500 if such individual is
an individual for whom a deduction
under section 151(c) is allowable to
the taxpayer for such taxable year.
‘‘(ii) SPECIAL RULE FOR MARRIED IN-
DIVIDUALS.—In 
the 
case 
of 
an
individual—
‘‘(I) who is married (within the
meaning of section 7703) as of the
close of the taxable year but does not
file a joint return for such year, and
‘‘(II) who does not live apart
from such individual’s spouse at all
times during the taxable year,
the limitation imposed by clause (i)(III)
shall be divided equally between the indi-
vidual and the individual’s spouse unless
they agree on a different division.
‘‘(3) DENIAL
OF
CREDIT
IF
CONTRIBUTION
MADE TO MEDICAL SAVINGS ACCOUNT.—No credit
shall be allowed under this subsection with respect
to any individual who makes a contribution to a
medical savings account (as defined in section
220(d)).
‘‘(c) PERCENTAGE HEALTH CREDIT.—For purposes
of subsection (a)—
‘‘(1) IN
GENERAL.—The percentage health
credit is an amount equal to the sum of—
‘‘(A) the applicable percentage of the sum
of—
‘‘(i) 25 percent of the qualified med-
ical expenses incurred by the taxpayer, his
spouse, and dependents during any cov-
erage month and paid by such taxpayer
during the taxable year which does not ex-
ceed 5 percent of the adjusted gross in-
come of such taxpayer for such year,
‘‘(ii) 40 percent of such expenses so
incurred and paid which exceeds 5 percent
but does not exceed 15 percent of such ad-
justed gross income, plus
‘‘(iii) 60 percent of such expenses so
incurred and paid which exceeds 15 per-
cent of such adjusted gross income, plus
‘‘(B) 25 percent of the qualified medical
savings account contributions.
‘‘(2) LIMITATIONS.—
‘‘(A) IN
GENERAL.—The credit allowed
under paragraph (1) for a taxable year shall
not exceed the sum of—
‘‘(i) the tax imposed by this chapter
for the taxable year on the taxpayer, his
spouse, and dependents with respect to
whom such credit is allowed, reduced by
the credits allowable against such tax
(other than the credits allowable under this
subpart), plus
‘‘(ii) the tax imposed by sections
1401, 3101, 3111, 3201(a), 3211(a)(1),
3221(a) for the taxable year with respect
to such taxpayer, spouse, and dependents.
‘‘(B) DOLLAR LIMITATION.—The amount
allowed as a credit under paragraph (1)(A) for
a taxable year shall not exceed $12,500 ($6,250
in the case of a married individual filing a sepa-
rate return).
‘‘(C) COORDINATION
WITH
SPECIAL
RE-
FUND OF SOCIAL SECURITY TAXES.—The taxes
referred to in subparagraph (A)(ii) shall not in-
clude any amount to which the taxpayer, his
spouse, or dependents is entitled to a special re-
fund under section 6413(c).
‘‘(D) SPECIAL RULE.—Any amounts paid
pursuant to an agreement under section 3121(l)
(relating to agreements entered into by Amer-
ican employers with respect to foreign affiliates)
which are equivalent to the taxes imposed by
sections 3101, 3111, 3201(a), and 3221(a)
shall be treated as taxes referred to in subpara-
graph (A)(ii).
‘‘(3) QUALIFIED
MEDICAL
SAVINGS
ACCOUNT
CONTRIBUTIONS.—The term ‘qualified medical sav-
ings account contributions’ means a payment to a
medical savings account if a deduction would (but
for section 220(k)) be allowed under section 220 to
the taxpayer for such payment for the taxable year
to the medical savings account of an individual.
‘‘(4) SPECIAL RULE IN THE CASE OF CHILD OF
DIVORCED
PARENTS, ETC.—For purposes of this
subsection, any child to whom section 152(e) applies
shall be treated as a dependent of both parents.
‘‘(d) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED INDIVIDUAL.—The term ‘quali-
fied individual’ means an individual who is a citizen
or national of the United States or is a lawful per-
manent resident of the United States (as defined in
section 7701(b)(6)).
‘‘(2) QUALIFIED
HEALTH
INSURANCE.—The
term ‘qualified health insurance’ means insurance—
‘‘(A) which is—
‘‘(i) health insurance coverage, as de-
fined by section 9832(b)(1), or
‘‘(ii) insurance which constitutes med-
ical care under a group health plan (as de-
fined by section 5000(b)(1)), other than
insurance a substantial portion of which
consists of excepted benefits (as defined by
section 9832(c)), and
‘‘(B) under which the annual out-of-pocket
expenses required to be paid (other than for
premiums) for covered benefits does not
exceed—
‘‘(i) $4,000 for self-only coverage, and
‘‘(ii) $6,000 for family coverage.
‘‘(3) QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
medical expenses’ means, with respect to a
qualified individual, amounts paid by such indi-
vidual for medical care for such individual, the
spouse of such individual, and any dependent
(as defined in section 152) of such individual,
but only to the extent such amounts are not
compensated for by insurance or otherwise.
‘‘(B) REDUCTION FOR AMOUNTS DISTRIB-
UTED FROM MSA’S.—Such term shall not in-
clude any distribution from a medical savings
account which is not includible in gross income
by reason of section 220(f)(1).
‘‘(C) APPLICABLE RULES.—For purposes
of subparagraph (A), rules similar to the rules
of subsections (b) and (c) of section 213 shall
apply.
‘‘(4) MEDICAL CARE.—The term ‘medical care’
has the meaning given to such term in section
213(d) determined without regard to—
‘‘(A) paragraph (1)(C) thereof, and
‘‘(B) so much of paragraph (1)(D) thereof
as relates to qualified long-term care insurance.
‘‘(5) COVERAGE MONTH.—
‘‘(A) IN
GENERAL.—The term ‘coverage
month’ means, with respect to an individual,
any month if as of the first day of such month
such individual is covered by qualified health in-
surance.
‘‘(B) MEDICARE, MEDICAID, AND
STATE
CHILDRENS’ HEALTH INSURANCE PROGRAM.—
Such term shall not include any month with re-
spect to an individual if, as of the first day of
such month, such individual—
‘‘(i) is entitled to any benefits under
title XVIII of the Social Security Act,
‘‘(ii) is a participant in the program
under title XIX of such Act, or
‘‘(iii) is a participant in the program
under title XXI of such Act.
‘‘(C) CERTAIN
OTHER
COVERAGE.—Such
term shall not include any month during a tax-
able year with respect to an individual if, at any
time during such month—
‘‘(i) such individual is enrolled in a
program to receive benefits under chapter
55 of title 10, United States Code,
‘‘(ii) any benefit is provided to such
individual under chapter 17 of title 38,
United States Code, or
‘‘(iii) any benefit is provided to such
individual under any medical care program
under the Indian Health Care Improve-
ment Act.
‘‘(D) PRISONERS.—Such term shall not in-
clude any month with respect to an individual
if, as of the first day of such month, such indi-
vidual is imprisoned under Federal, State, or
local authority.
‘‘(e) 
SPECIAL
RULES.—For 
purposes 
of 
this
section—
‘‘(1) NONRESIDENT ALIENS.—If the taxpayer is
a nonresident alien individual for any portion of the
taxable year, this section shall apply only if such in-
dividual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
‘‘(2) DENIAL OF CREDIT TO DEPENDENTS.—No
credit shall be allowed under this section to any indi-
vidual with respect to whom a deduction under sec-
tion 151 is allowable to another taxpayer for a tax-
able year beginning in the calendar year in which
such individual’s taxable year begins.
‘‘(3) NO OTHER CREDIT ALLOWED WITH RE-
SPECT
TO
DEPENDENT
IF
FIXED
CREDIT
AL-
LOWED.—If a credit is allowed to a taxpayer for a
taxable year under subsection (b) with respect to a
dependent, no credit with respect to such dependent
shall be allowed under this section for such taxable
year to any other taxpayer.
‘‘(4) 
IDENTIFICATION
NUMBER
REQUIRE-
MENT.—No credit shall be allowed under this section
with respect to an eligible individual who does not
include on the return of tax for the taxable year—
‘‘(A) such individual’s taxpayer identifica-
tion number,
‘‘(B) if the individual is married (within
the meaning of section 7703), the taxpayer
identification number of such individual’s
spouse, and
‘‘(C) the name, age, and taxpayer identi-
fication number of each dependent with respect
to whom a credit is claimed under this section.
‘‘(5) COORDINATION
WITH
ADVANCE
PAY-
MENT.—Rules similar to the rules of section 32(g)
shall apply to any credit to which this section ap-
plies.
‘‘(6) TREATMENT OF AMOUNTS PAID BY EM-
PLOYER.—Amounts paid by an employer for cov-
erage under an accident or health plan which con-
stitutes medical care for a taxpayer, his spouse and
dependents, which would (but for section 106(d)) be
excludable from gross income shall be treated as
paid by the taxpayer.
‘‘(7) COST-OF-LIVING ADJUSTMENT.—
‘‘(A) IN
GENERAL.—In the case of any
taxable year beginning in a calendar year after
2002, each dollar amount contained in sub-
sections (b)(2)(A)(ii), (b)(2)(B), (c)(2)(B), and
(d)(2)(B) shall be increased by the medical care
cost adjustment of such amount for such cal-
endar year. If any increase determined under
the preceding sentence is not a multiple of $50,
such increase shall be rounded to the nearest
multiple of $50.
‘‘(B) 
MEDICAL
CARE
COST
ADJUST-
MENT.—For purposes of subparagraph (A), the
medical care cost adjustment for any calendar
year is the percentage (if any) by which—
‘‘(i) the medical care component of
the Consumer Price Index (as defined in
section 1(f)(5)) for August of the pre-
ceding calendar year, exceeds
‘‘(ii) such component for August of
2001.
‘‘(f) RESTRICTIONS ON TAXPAYERS WHO IMPROP-
ERLY CLAIMED CREDIT IN PRIOR YEAR.—
‘‘(1) TAXPAYERS MAKING PRIOR FRAUDULENT
OR RECKLESS CLAIMS.—
‘‘(A) IN GENERAL.—No credit shall be al-
lowed under this section for any taxable year in
the disallowance period.
‘‘(B) DISALLOWANCE
PERIOD.—For pur-
poses of subparagraph (A), the disallowance pe-
riod is the period of 2 taxable years after the
most recent taxable year for which there was a
final determination that the taxpayer’s claim of
credit under this section was due to fraud or
reckless or intentional disregard of rules and
regulations.
‘‘(2) TAXPAYERS
MAKING
IMPROPER
PRIOR
CLAIMS.—In the case of a taxpayer who is denied
credit under this section for any taxable year as a
result of the deficiency procedures under subchapter
B of chapter 63, no credit shall be allowed under
this section for any subsequent taxable year unless
the taxpayer provides such information as the Sec-
retary may require to demonstrate eligibility for
such credit.
‘‘(g) DENIAL OF DOUBLE BENEFIT.—No credit shall
be allowed under this section for any expense for which
a deduction or credit is allowed under any other provision
of this chapter.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for subpart C of part IV of subchapter A of chapter 1
of the Internal Revenue Code of 1986 is amended by strik-
ing the item relating to section 35 and inserting the fol-
lowing new items:
‘‘Sec. 35. Health insurance costs.
‘‘Sec. 36. Overpayments of tax.’’.
(c) 
APPROPRIATIONS
FOR
REFUND.—Section
1324(b)(2) of title 31, United States Code, is amended
by inserting before the period ‘‘, or of sections 35 and 36
of such Code’’.
(d) REPORT ON SUITABLE INDEX FOR INFLATION
ADJUSTMENT.—If the Bureau of Labor Statistics of the
Department of Commerce begins publishing a component
of the consumer price index which tracks health insurance
other than Medicare, the Secretary of the Treasury shall
submit a report to the Congress on the suitability of
changing the index referred to in section 35(e)(7)(B) of
the Internal Revenue Code of 1986 (other than for pur-
poses of subsection (c)(2)(B) of such section), as added
by this section, to such component.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 3. ADVANCE PAYMENT OF CREDIT FOR PURCHASERS
OF QUALIFIED HEALTH INSURANCE.
(a) IN GENERAL.—Chapter 77 of the Internal Rev-
enue Code of 1986 (relating to miscellaneous provisions)
is amended by adding at the end the following new section:
‘‘SEC. 7527. ADVANCE PAYMENT OF HEALTH INSURANCE
CREDIT FOR PURCHASERS OF QUALIFIED
HEALTH INSURANCE.
‘‘(a) GENERAL RULE.—
‘‘(1) PAYMENTS BY SECRETARY.—In the case
of an eligible individual, the Secretary shall make
payments—
‘‘(A) in the case of an employee covered by
qualified health insurance of, or contributed to
by, the employer (other than insurance which
constitutes a self-insured group health plan), to
the employer if the employer elects the applica-
tion of this section,
‘‘(B) in the case of an employee covered by
qualified health insurance of, or contributed to
by, the employer which constitutes a self-in-
sured group health plan, to the employer, and
‘‘(C) in any other case, to the health insur-
ance issuer of qualified health insurance of such
individual.
‘‘(2) AMOUNT OF PAYMENTS.—Payments under
paragraph (1) shall be made in an amount equal to
the qualified health insurance credit advance amount
of such individual.
‘‘(3) PAYMENTS TO BE TREATED AS PAYMENTS
OF WITHHOLDING AND FICA TAXES.—
‘‘(A) PAYMENTS
MADE
FROM
CERTAIN
TAXES OWED.—With respect to any payment
under paragraph (1), rules similar to the rules
of sections 3507(d) (1) and (4) shall apply. In
the case of payments to a health insurance
issuer with respect to an individual who is not
an employee of such issuer, rules under the pre-
ceding sentence shall be applied to any amounts
for which such issuer is liable under section
3401, 3102, and 3111.
‘‘(B) DIFFERENCE PAYABLE IN CASH.—In
the case of any employer or health insurance
issuer, if for any month the aggregate payment
to such employer or issuer by reason of the pre-
ceding sentence is less than the aggregate quali-
fied health insurance credit advance amount,
the Secretary shall pay the difference directly to
such employer or issuer (as the case may be).
For purposes of this subparagraph, the Sec-
retary may require the employer and the health
insurance issuer to provide such additional in-
formation as the Secretary determines appro-
priate.
‘‘(4) TRANSFER TO TRUST FUNDS.—The Sec-
retary shall transfer from the general fund to the
Old-Age, Survivors, and Disability Insurance Trust
Fund and to the Hospital Insurance Trust Fund
amounts equivalent to the amount of the reduction
in taxes imposed by chapter 21 by reason of para-
graph (3). Any such transfer shall be made at the
same time the reduced taxes would have been depos-
ited in either such Trust Fund.
‘‘(b) ELIGIBLE INDIVIDUAL.—For purposes of this
section, the term ‘eligible individual’ means any
individual—
‘‘(1) who purchases qualified health insurance,
and
‘‘(2) for whom a qualified health insurance
credit eligibility certificate is in effect.
‘‘(c) QUALIFIED HEALTH INSURANCE CREDIT ELIGI-
BILITY CERTIFICATE.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a qualified health insurance credit eligibility
certificate is a statement furnished by an individual
to the employer or the health insurance issuer
which—
‘‘(A) certifies that the individual will be eli-
gible to receive the credit provided by section
35(b) for the taxable year,
‘‘(B) estimates the amount of such credit
for such taxable year,
‘‘(C) contains the name, address, and TIN
of each individual who is obtaining coverage
under such certificate,
‘‘(D) certifies that no individual described
in subparagraph (C) has another health insur-
ance credit eligibility certificate in effect, and
‘‘(E) provides such other information as
the Secretary may require for purposes of this
section.
‘‘(2) CERTIFICATE
IN
EFFECT.—A qualified
health insurance credit eligibility certificate shall
take effect on the first day of a coverage month (as
defined in section 35(d)) and shall remain in effect
with respect to the individual until the earlier of rev-
ocation by the individual, another such certificate
takes effect under this section with respect to the in-
dividual, or cancellation of the qualified health insur-
ance by the issuer or the employer.
‘‘(d) QUALIFIED HEALTH INSURANCE CREDIT AD-
VANCE AMOUNT.—For purposes of this section, the term
‘qualified health insurance credit advance amount’ means,
with respect to any employer or issuer of qualified health
insurance, the Secretary’s estimate of the amount of credit
allowable under section 35(b) to the individual for the tax-
able year which is attributable to the insurance provided
to the individual by such employer or issuer.
‘‘(e) REQUIRED DOCUMENTATION FOR RECEIPT OF
PAYMENTS OF ADVANCE AMOUNT.—No payment of a
qualified health insurance credit advance amount with re-
spect to any eligible individual may be made under sub-
section (a) unless the employer or health insurance issuer
(as the case may be)—
‘‘(1) provides to the Secretary the qualified
health insurance credit eligibility certificate of such
individual, and
‘‘(2) agrees to provide the return relating to
such individual under section 6050T (or with respect
to such employer or issuer, an agreement relating to
such individual is in effect under section 6050T(e)).
‘‘(f) QUALIFIED HEALTH INSURANCE.—For pur-
poses of this section, the term ‘qualified health insurance’
has the meaning given to such term by section 35(d).
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pur-
poses of this section.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for chapter 77 of such Code is amended by adding at the
end the following new item:
‘‘Sec. 7527. Advance payment of health insurance credit for pur-
chasers of qualified health insurance.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 2002.
SEC. 4. INFORMATION REPORTING.
(a) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 61 of the Internal Revenue Code of
1986 (relating to information concerning transactions
with other persons) is amended by inserting after section
6050S the following new section:
‘‘SEC. 6050T. RETURNS RELATING TO PAYMENTS FOR
QUALIFIED HEALTH INSURANCE.
‘‘(a) IN GENERAL.—Any person who, in connection
with a trade or business conducted by such person, re-
ceives payments during any calendar year—
‘‘(1) from any person for coverage of such per-
son or any other person under qualified health insur-
ance, or
‘‘(2) under section 7527 with respect to a quali-
fied health insurance credit eligibility certificate,
shall make the return described in subsection (b) (at such
time as the Secretary may by regulations prescribe) with
respect to each person from whom any such payment is
received.
‘‘(b) FORM AND MANNER OF RETURNS.—A return
is described in this subsection if such return—
‘‘(1) is in such form as the Secretary may pre-
scribe, and
‘‘(2) contains—
‘‘(A) the name, address, and TIN of the
person from whom payments described in sub-
section (a) were received, and the aggregate
amounts of such payments,
‘‘(B) the name, address, and TIN of each
individual who was provided by such person
with coverage under qualified health insurance
by reason of such payments and the period of
such coverage,
‘‘(C) the coverage months (as defined in
section 35(d)) of each individual described in
subparagraph (A) and (B),
‘‘(D) the amounts advanced to such person
from the Secretary under section 7527 as pre-
mium payments for such insurance, and
‘‘(E) such other information as the Sec-
retary may reasonably prescribe.
‘‘(c) QUALIFIED HEALTH INSURANCE.—For pur-
poses of this section, the term ‘qualified health insurance’
means qualified health insurance (as defined in section
35(d)) other than, to the extent provided in regulations
prescribed by the Secretary, any other insurance covering
an individual if no credit is allowable under section 35
with respect to such coverage.
‘‘(d) STATEMENTS TO BE FURNISHED TO INDIVID-
UALS WITH RESPECT TO WHOM INFORMATION IS RE-
QUIRED.—Every person required to make a return under
subsection (a) shall furnish to each individual whose name
is required under subsection (b)(2)(A) to be set forth in
such return a written statement showing—
‘‘(1) the name and address of the person re-
quired to make such return and the phone number
of the information contact for such person,
‘‘(2) the aggregate amount of payments de-
scribed in subsection (a) received by the person re-
quired to make such return from the individual to
whom the statement is required to be furnished, and
‘‘(3) the information required under subsections
(b)(2)(B), (C), (D), and (E) with respect to such
payments.
The written statement required under the preceding sen-
tence shall be furnished on or before January 31 of the
year following the calendar year for which the return
under subsection (a) is required to be made.
‘‘(e) RETURNS WHICH WOULD BE REQUIRED TO BE
MADE BY 2 OR MORE PERSONS.—A person required to
make a return under subsection (a) (but for this sub-
section) shall not be required to make such return if,
under such regulations as the Secretary shall prescribe,
such person has entered into an agreement with another
person to make the return required by subsection (a).’’.
(b) ASSESSABLE PENALTIES.—
(1) Subparagraph (B) of section 6724(d)(1) of
such Code (relating to definitions) is amended by re-
designating clauses (xi) through (xvii) as clauses
(xii) through (xviii), respectively, and by inserting
after clause (x) the following new clause:
‘‘(xi) section 6050T (relating to re-
turns relating to payments for qualified
health insurance),’’.
(2) Paragraph (2) of section 6724(d) of such
Code is amended by striking ‘‘or’’ at the end of the
next to last subparagraph, by striking the period at
the end of the last subparagraph and inserting ‘‘,
or’’, and by adding at the end the following new sub-
paragraph:
‘‘(BB) section 6050T(d) (relating to re-
turns relating to payments for qualified health
insurance).’’.
(c) CLERICAL AMENDMENT.—The table of sections
for subpart B of part III of subchapter A of chapter 61
of such Code is amended by inserting after the item relat-
ing to section 6050S the following new item:
‘‘Sec. 6050T. Returns relating to payments for qualified health
insurance.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 5. CREDIT FOR CERTAIN EMPLOYMENT TAXES WITH
RESPECT 
TO 
FORMERLY 
EXCLUDABLE
HEALTH INSURANCE COSTS.
(a) IN GENERAL.—Subpart D of part IV of sub-
chapter A of chapter 1 of such Code (relating to business
related credits) is amended by adding at the end the fol-
lowing:
‘‘SEC. 45D. CREDIT FOR CERTAIN EMPLOYMENT TAXES
WITH RESPECT TO FORMERLY EXCLUDABLE
HEALTH INSURANCE COSTS.
‘‘(a) GENERAL RULE.—For purposes of section 38,
in the case of an employer, the former health exclusion
credit determined under this section for the taxable year
is the aggregate of the creditable employee amounts.
‘‘(b) CREDITABLE EMPLOYEE AMOUNT.—For pur-
poses of subsection (a)—
‘‘(1) IN GENERAL.—The term ‘creditable em-
ployee amount’ means, with respect to each covered
employee, the employer tax on the formerly exclud-
able health costs of the covered employee’s wages or
compensation (as the case may be).
‘‘(2) EMPLOYER TAX ON THE FORMERLY EX-
CLUDABLE HEALTH COSTS.—The term ‘employer tax
on the formerly excludable health costs’ means the
amount equal to the excess of—
‘‘(A) the tax imposed under section 3111
or 3221(a) on wages or compensation (as the
case may be) of the employee for the calendar
year ending in or with the end of the taxable
year of the employer, over
‘‘(B) such tax for such calendar year which
would be imposed on—
‘‘(i) wages or compensation (as the
case may be) of such employee, if such
wages or compensation were reduced by
‘‘(ii) the total amount of the em-
ployer-provided coverage under an accident
or health plan which would have been ex-
cludable from the gross income of such em-
ployee under section 106 but for section
106(d).
‘‘(3) COVERED EMPLOYEE.—The term ‘covered
employee’ means an individual who—
‘‘(A) was employed by the employer on
January 1, 2001,
‘‘(B) was covered at all times during cal-
endar year 2001 by such employer’s employer-
provided coverage under an accident or health
plan which is excludable from the gross income
of such individual under section 106, and
‘‘(C) for the period—
‘‘(i) beginning on January 1, 2002,
and
‘‘(ii) ending on the day before the
first day such person is not covered by
such employer’s employer-provided cov-
erage for an accident or health plan which
would have been excludable from the gross
income of such individual under section
106 but for section 106(d).
‘‘(4) WAGES AND COMPENSATION.—The terms
‘wages’ and ‘compensation’ shall have the meaning
given to such terms by sections 3121(a) and
3231(e), respectively.
‘‘(c) SPECIAL RULES.—
‘‘(1) SPECIAL
RULE
CONCERNING
SELF-EM-
PLOYED.—The term ‘employer’ shall not include an
individual who is an employee within the meaning of
section 401(c)(1).
‘‘(2) CERTAIN RULES MADE APPLICABLE.—For
purposes of this section, rules similar to the rules of
paragraphs (1) and (2) of section 41(f) shall apply.
‘‘(d) NOTICE OF VALUE OF HEALTH INSURANCE
COVERAGE.—No credit shall be allowed under subsection
(a) to an employer unless such employer notifies (in the
manner the Secretary shall provide) each individual who
is an employee of the employer during calendar year 2001
of the aggregate value of the applicable premiums (as de-
fined by section 4980B(f)(4)) provided to the employee
during such calendar year.
‘‘(e) TERMINATION.—This section shall not apply to
taxable years beginning after December 31, 2003.’’.
(b) CURRENT YEAR BUSINESS CREDIT CALCULA-
TION.—Section 38(b) of such Code (relating to current
year business credit) is amended by striking ‘‘plus’’ at the
end of paragraph (11), by striking the period at the end
of paragraph (12) and inserting ‘‘, plus’’, and by adding
at the end the following:
‘‘(13) the former health exclusion credit deter-
mined under section 45D(a).’’.
(c) LIMITATION ON CARRYBACK.—Subsection (d) of
section 39 of such Code (relating to carryback and
carryforward of unused credits) is amended by adding at
the end the following:
‘‘(9) NO CARRYBACK OF FORMER HEALTH EX-
CLUSION
CREDIT
BEFORE
EFFECTIVE
DATE.—No
amount of unused business credit available under
section 45D may be carried back to a taxable year
beginning on or before the date of the enactment of
this paragraph.’’.
(d) CLERICAL AMENDMENT.—The table of sections
for subpart D of part IV of subchapter A of chapter 1
of such Code is amended by inserting after the item relat-
ing to section 45C the following:
‘‘Sec. 45D. Credit for certain employment taxes with respect to
formerly excludable health insurance costs.’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 6. ADDITIONAL PROVISIONS.
(a) TERMINATION OF EXCLUSION FROM GROSS IN-
COME FOR EMPLOYER-PROVIDED HEALTH CARE COV-
ERAGE.—Section 106 of the Internal Revenue Code of
1986 (relating to contributions by employer to accident
and health plans) is amended by adding at the end the
following new subsection:
‘‘(d) INCLUSION
OF
INSURANCE
CONSTITUTING
MEDICAL CARE (OTHER THAN LONG-TERM CARE INSUR-
ANCE).—
‘‘(1) IN
GENERAL.—Subsection (a) shall not
apply to—
‘‘(A) 
any 
employer-provided 
coverage
under an accident or health plan which con-
stitutes medical care, and
‘‘(B) any employer contribution to a med-
ical savings account which is treated by sub-
section (b) as employer-provided coverage for
medical expenses under an accident or health
plan.
‘‘(2) EXCEPTION FOR INDIVIDUALS ENTITLED
TO MEDICARE.—Paragraph (1) shall not apply to
any employee who, as of the time such employer-pro-
vided coverage was provided, is entitled to any bene-
fits under title XVIII of the Social Security Act.
‘‘(3) MEDICAL CARE DEFINED.—For purposes
of paragraph (1), the term ‘medical care’ has the
meaning given to such term in section 213(d) deter-
mined without regard to—
‘‘(A) paragraph (1)(C) thereof, and
‘‘(B) so much of paragraph (1)(D) thereof
as relates to qualified long-term care insurance.
‘‘(4) SPECIAL RULE FOR VALUATION OF INCLU-
SION
OF
EMPLOYER-PROVIDED
HEALTH
COV-
ERAGE.—The amount included in gross income by
reason of paragraph (1) shall be the cost to the em-
ployer of the employer-provided coverage under an
accident or health plan with respect to the employee
for the calendar year. Such cost shall be the applica-
ble premium (as defined by section 4980B(f)(4)).’’.
(b) DISALLOWANCE OF DEDUCTION FOR HEALTH
INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.—
Section 162(l) of such Code is amended by adding at the
end the following new paragraph:
‘‘(6) 
TERMINATION
OF
DEDUCTION
FOR
HEALTH INSURANCE.—In the case of taxable years
beginning after December 31, 2001, this subsection
shall only apply to amounts paid for qualified long-
term care insurance contracts.’’.
(c) MEDICAL CARE DEDUCTION LIMITED TO QUALI-
FIED LONG-TERM CARE AND INDIVIDUALS ENTITLED TO
MEDICARE.—Section 213 of such Code (relating to med-
ical, dental, etc., expenses) is amended by adding at the
end the following new subsection:
‘‘(f) TERMINATION.—
‘‘(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), subsection (a) shall not apply to