I
107TH CONGRESS
1ST SESSION
H. R. 2658
To amend the Internal Revenue Code of 1986 to exclude employer contribu-
tions to health care expenditure accounts from gross income, and to
amend title I of the Employee Retirement Income Security Act of 1974
to clarify the applicability of such title to plans employing such accounts.
IN THE HOUSE OF REPRESENTATIVES
JULY 26, 2001
Mr. DEMINT (for himself, Mr. ARMEY, Mrs. JOHNSON of Connecticut, Mr.
BURR of North Carolina, Mr. COOKSEY, Mr. FLETCHER, Mr. HERGER,
Mr. HOEKSTRA, Mr. MCKEON, Mr. SAM JOHNSON of Texas, Mr. SHAD-
EGG, Mrs. MYRICK, Mr. SOUDER, Mr. RYAN of Wisconsin, Mr. TOOMEY,
Mr. STEARNS, Mr. PITTS, Mr. BARTLETT of Maryland, Mr. PENCE, Mr.
TIAHRT, Mr. PAUL, Mr. MANZULLO, and Mr. TIBERI) introduced the fol-
lowing bill; which was referred to the Committee on Ways and Means,
and in addition to the Committee on Education and the Workforce, for
a period to be subsequently determined by the Speaker, in each case for
consideration of such provisons as fall within the jursidiction of the com-
mittee concerned
A BILL
To amend the Internal Revenue Code of 1986 to exclude
employer contributions to health care expenditure ac-
counts from gross income, and to amend title I of the
Employee Retirement Income Security Act of 1974 to
clarify the applicability of such title to plans employing
such accounts.
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 Account
Act of 2001’’.
SEC. 2. HEALTH CARE EXPENDITURE ACCOUNTS.
(a) EXCLUSION FOR EMPLOYER CONTRIBUTIONS TO
HEALTH CARE EXPENDITURE ACCOUNTS.—
(1) EXCLUSION
FROM
INCOME
TAX.—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) CONTRIBUTIONS TO HEALTH CARE EXPENDI-
TURE ACCOUNTS.—
‘‘(1) IN
GENERAL.—Amounts contributed by
the employee’s employer to any health care expendi-
ture account of such employee shall be treated as
employer-provided coverage for medical expenses
under an accident or health plan.
‘‘(2) LIMITATIONS.—
‘‘(A) EMPLOYEE
MUST
BE
COVERED
BY
HEALTH INSURANCE.—Paragraph (1) shall not
apply with respect to a contribution unless, at
the time of such contribution, the employee was
covered by insurance which constitutes medical
care for the employee and which is qualified as
a health plan by the State in which such plan
is offered. For purposes of the preceding sen-
tence, the term ‘medical care’ shall have the
meaning given to such term by section 213(d)
(without regard to paragraph (1)(C) and so
much of paragraph (1)(D) as relates to quali-
fied long-term care insurance contracts).
‘‘(B) EMPLOYEE MAY NOT CONTRIBUTE TO
BOTH HEALTH CARE EXPENDITURE ACCOUNT
AND ARCHER MSA IN THE SAME YEAR.—Para-
graph (1) shall not apply with respect to any
contribution in a taxable year if a deduction
under section 220 is allowed to the employee
for the taxable year.
‘‘(C) EMPLOYER MAY NOT CONTRIBUTE TO
BOTH HEALTH CARE EXPENDITURE ACCOUNT
AND
GROUP
HEALTH
PLAN.—Paragraph (1)
shall not apply with respect to any contribution
to an employee of an employer in a taxable year
if an exclusion is allowed under subsection (a)
for such taxable year to any employee of the
employer for employer-provided coverage for
medical expenses under an accident or health
plan (determined without regard to this sub-
section).
Paragraph (1) shall not apply for purposes of sec-
tion 4980B.
‘‘(6) DEFINITIONS.—For purposes of this sub-
section, the terms ‘eligible individual’ and ‘health
care expenditure account’ have the respective mean-
ings given to such terms by section 531.
‘‘(7) CROSS REFERENCE.—
‘‘For penalty on failure by employer to make com-
parable contributions to the health care expendi-
ture accounts of comparable employees, see section
4980F.’’.
(b) EXCLUSION FOR EMPLOYEE CONTRIBUTIONS TO
HEALTH CARE EXPENDITURE ACCOUNTS.—
(1) IN GENERAL.—Part III of subchapter B of
chapter 1 of such Code (relating to items specifically
excluded from gross income) is amended by redesig-
nating section 139 as section 139A and by inserting
after section 138 the following new section:
‘‘SEC. 139. EMPLOYEE CONTRIBUTIONS TO HEALTH CARE
EXPENDITURE ACCOUNTS.
‘‘(a) IN GENERAL.—Gross income shall not include
any contribution by an employee to a health care expendi-
ture account (as defined in section 531).
‘‘(b) LIMITATION.—The amount excluded by sub-
section (a) shall not exceed the lesser of—
‘‘(1) the limitation for the taxable year with re-
spect to the employee under section 531(c)(1)(B), or
‘‘(2) an amount equal to the compensation (as
defined in section 219(f)(1)) includible in the em-
ployee’s gross income for such taxable year (deter-
mined without regard to this section).’’.
(2) CLERICAL AMENDMENT.—The table of sec-
tions for such part III is amended by striking the
last item and inserting the following new items:
‘‘Sec. 139. Employee contributions to health care expenditure ac-
counts.
‘‘Sec. 139A. Cross references to other Acts.’’.
(c) HEALTH CARE EXPENDITURE ACCOUNTS.—Sub-
chapter F of chapter 1 of such Code (relating to exempt
organizations) is amended by adding at the end the fol-
lowing new part:
‘‘PART IX—HEALTH CARE EXPENDITURE
ACCOUNTS
‘‘Sec. 531. Health care expenditure accounts.
‘‘SEC. 531. HEALTH CARE EXPENDITURE ACCOUNTS.
‘‘(a) HEALTH CARE EXPENDITURE ACCOUNT.—For
purposes of this section, the term ‘health care expenditure
account’ means a trust created or organized in the United
States exclusively for the purpose of paying the qualified
medical expenses of the account holder, but only if the
written governing instrument creating the trust meets—
‘‘(1) the requirements of subsections (c), and
‘‘(2) the account requirements of subpara-
graphs (B), (C), (D), and (E) of section 220(d)(1).
‘‘(b) QUALIFIED MEDICAL EXPENSES.—
‘‘(1) IN GENERAL.—The term ‘qualified medical
expenses’ means, with respect to an account holder,
amounts paid by such holder for medical care (as
defined in section 213(d)) for such individual, the
spouse of such individual, and any dependent (as de-
fined in section 152) of such individual, but only to
the extent such amounts are not compensated for by
insurance or otherwise.
‘‘(2) ACCOUNT
HOLDER.—The term ‘account
holder’ means the individual on whose behalf the
health care expenditure account was established.
‘‘(3) CERTAIN RULES TO APPLY.—Rules similar
to the following rules shall apply for purposes of this
section:
‘‘(A) Section 408(g) (relating to commu-
nity property laws).
‘‘(B) Section 408(h) (relating to custodial
accounts).
‘‘(C) Section 408(m) (relating to invest-
ment in collectibles treated as distributions).
‘‘(D) Section 220(f)(7) (relating to trans-
fer of account incident to divorce).
‘‘(E) Section 220(f)(8) (relating to treat-
ment after death of account holder).
‘‘(c) CONTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except in the case of a
rollover contribution described in subsection (e)(5),
the requirement of this paragraph is that no con-
tribution will be accepted—
‘‘(A) unless it is in cash, and
‘‘(B) if such contribution would result in
aggregate contributions for the taxable year ex-
ceeding $5,000.
‘‘(2) COORDINATION WITH EXCLUSION FOR EM-
PLOYER
CONTRIBUTIONS.—The limitation which
would (but for this paragraph) apply under para-
graph (1)(B) to the taxpayer for any taxable year
shall be reduced (but not below zero) by the amount
which would (but for section 106(d)) be includible in
the taxpayer’s gross income for such taxable year.
‘‘(d) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) IN GENERAL.—A health care expenditure
account is exempt from taxation under this subtitle
unless such account has ceased to be a health care
expenditure account. Notwithstanding the preceding
sentence, any such account is subject to the taxes
imposed by section 511 (relating to imposition of tax
on unrelated business income of charitable, etc. or-
ganizations).
‘‘(2) ACCOUNT TERMINATIONS.—Rules similar
to the rules of paragraphs (2) and (4) of section
408(e) shall apply to health care expenditure ac-
counts, and any amount treated as distributed under
such rules shall be treated as not used to pay quali-
fied medical expenses.
‘‘(e) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) AMOUNTS USED FOR QUALIFIED MEDICAL
EXPENSES.—Any amount paid or distributed out of
a health care expenditure account which is used ex-
clusively to pay qualified medical expenses of any ac-
count holder shall not be includible in gross income.
‘‘(2) INCLUSION OF AMOUNTS NOT USED FOR
QUALIFIED MEDICAL EXPENSES.—Any amount paid
or distributed out of a health care expenditure ac-
count which is not used exclusively to pay the quali-
fied medical expenses of the account holder shall be
included in the gross income of such holder.
‘‘(3) CONTRIBUTIONS RETURNED BEFORE DUE
DATE OF RETURN.—Paragraph (2) shall not apply
to distributions of any contribution made during the
taxable year on behalf of the account holder if—
‘‘(A) such distribution is made on or before
the last day prescribed by law (including exten-
sions of time) for filing such holder’s return for
such taxable year, and
‘‘(B) such distribution is accompanied by
the amount of net income attributable to such
contribution.
Any net income described in subparagraph (B) shall
be included in the gross income of the individual for
the taxable year in which such contribution is made.
‘‘(4) ADDITIONAL TAX ON DISTRIBUTIONS NOT
USED FOR QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by
this chapter on the account holder for any tax-
able year in which there is a payment or dis-
tribution from a health care expenditure ac-
count of such holder which is includible in gross
income under paragraph (2) shall be increased
by 15 percent of the amount which is so includ-
ible.
‘‘(B) EXCEPTION FOR DEATH.—Subpara-
graph (A) shall not apply if the payment or dis-
tribution is made after the account holder dies.
‘‘(5) ROLLOVER CONTRIBUTION.—An amount is
described in this paragraph as a rollover contribu-
tion if it meets the requirements of subparagraphs
(A) and (B).
‘‘(A) IN
GENERAL.—Paragraph (2) shall
not apply to any amount paid or distributed
from a health care expenditure account to the
account holder to the extent the amount re-
ceived is paid into a health care expenditure ac-
count or an Archer MSA for the benefit of such
holder not later than the 60th day after the day
on which the holder receives the payment or
distribution.
‘‘(B) LIMITATION.—This paragraph shall
not apply to any amount described in subpara-
graph (A) received by an individual from a
health care expenditure account if, at any time
during the 1-year period ending on the day of
such receipt, such individual received any other
amount described in subparagraph (A) from a
health care expenditure account which was not
includible in the individual’s gross income be-
cause of the application of this paragraph or
section 220(f)(5) (relating to rollover contribu-
tion with respect to Archer MSAs).
‘‘(6) COORDINATION WITH OTHER MEDICAL EX-
PENSE PROVISIONS.—
‘‘(A) MEDICAL
EXPENSE
DEDUCTION.—
For purposes of determining the amount of the
deduction under section 213, any payment or
distribution out of a health care expenditure ac-
count for qualified medical expenses shall not
be treated as an expense paid for medical care.
‘‘(B) ARCHER MSAS.—For purposes of sec-
tion 220, the amount of qualified medical ex-
penses otherwise taken into account under
paragraph (1) for a taxable year shall be re-
duced (before the application of paragraphs (2)
and (4)) by the sum of the amounts distributed
from an Archer MSA for the taxable year.
‘‘(f) REPORTS.—The Secretary may require the
trustee of a health care expenditure account to make such
reports regarding such account to the Secretary and to
the account holder with respect to contributions, distribu-
tions, and such other matters as the Secretary determines
appropriate. 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 the Secretary.’’.
(d) 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)(A) by striking ‘‘or’’ at the end of paragraph
(3) of subsection (a),
(B) by inserting ‘‘or’’ after the comma at the
end of paragraph (4), and
(C) by inserting after paragraph (4) the fol-
lowing:
‘‘(2) a health care expenditure account (within
the meaning of section 531(d)),’’, and
(2) by adding at the end the following new sub-
section:
‘‘(d) EXCESS CONTRIBUTIONS TO HEALTH CARE EX-
PENDITURE ACCOUNTS.—For purposes of this section, in
the case of health care expenditure accounts (within the
meaning of section 531(d)), the term ‘excess contribu-
tions’ means the sum of—
‘‘(1) the aggregate amount contributed for the
taxable year to the accounts (other than rollover
contributions described in section 531(e)(5)) which
is neither excludable from gross income under sec-
tion 106(d) nor allowable as a contribution under
section 531 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 531(e)(2), and
‘‘(B) the excess (if any) of—
‘‘(i) the maximum amount allowable
as a contribution under section 531(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 care expenditure account
in a distribution to which section 531(e)(3) applies shall
be treated as an amount not contributed.’’.
(e) 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
CARE
EX-
PENDITURE
ACCOUNTS.—An individual for whose
benefit a health care expenditure account (within the
meaning of section 531) is established shall be ex-
empt from the tax imposed by this section with re-
spect to any transaction concerning such account
(which would otherwise be taxable under this sec-
tion) if, with respect to such transaction, the ac-
count ceases to be a health care expenditure account
by reason of the application of section 531(d)(2) to
such account.’’.
(2) Paragraph (1) of section 4975(e) of such
Code is amended by striking ‘‘or’’ at the end of sub-
paragraph (E), by redesignating subparagraph (F)
as subparagraph (G), and by inserting after sub-
paragraph (E) the following new subparagraph:
‘‘(F) a health care expenditure account de-
scribed in section 531(d), or’’.
(f) FAILURE TO PROVIDE REPORTS ON HEALTH
CARE EXPENDITURE ACCOUNTS.—Paragraph (2) of sec-
tion 6693(a) of such Code is amended by striking ‘‘and’’
at the end of subparagraph (C), by striking the period at
the end of subparagraph (D) and inserting ‘‘, and’’, and
by adding at the end the following new subparagraph:
‘‘(E) section 531(f) (relating to health care
expenditure accounts).’’.
(g) WITHHOLDING TAX.—Subsection (a) of section
3401 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) any payment made to or for the benefit
of an employee if at the time of such payment it is
reasonable to believe that the employee will be able
to exclude such payment from income under section
106(d).’’.
(h) EMPLOYER CONTRIBUTIONS REQUIRED TO BE
SHOWN ON W–2.—Subsection (a) of section 6051 of such
Code is amended by striking ‘‘and’’ at the end of para-
graph (10), by striking the period at the end of paragraph
(11) and inserting ‘‘, and’’, and by inserting after para-
graph (11) the following new paragraph:
‘‘(12) the amount contributed to any health
care expenditure account (as defined in section 531)
of such employee or such employee’s spouse.’’.
(i) PENALTY FOR FAILURE OF EMPLOYER TO MAKE
COMPARABLE HEALTH CARE EXPENDITURE ACCOUNT
CONTRIBUTIONS.—
(1) IN GENERAL.—Chapter 43 of such Code is
amended by adding after section 4980E the fol-
lowing new section:
‘‘SEC. 4980F. FAILURE OF EMPLOYER TO MAKE COM-
PARABLE HEALTH CARE EXPENDITURE AC-
COUNT CONTRIBUTIONS.
‘‘(a) GENERAL RULE.—In the case of an employer
who makes a contribution to the health care expenditure
account of any employee during a calendar year, there is
hereby imposed a tax on the failure of such employer to
meet the requirements of subsection (d) for such calendar
year.
‘‘(b) AMOUNT OF TAX.—The amount of the tax im-
posed by subsection (a) on any failure for any calendar
year is the amount equal to 35 percent of the aggregate
amount contributed by the employer to health care ex-
penditure accounts of employees for taxable years of such
employees ending with or within such calendar year.
‘‘(c) WAIVER BY SECRETARY.—In the case of a fail-
ure which is due to reasonable cause and not to willful
neglect, the Secretary may waive part or all of the tax
imposed by subsection (a) to the extent that the payment
of such tax would be excessive relative to the failure in-
volved.
‘‘(d) EMPLOYER REQUIRED TO MAKE COMPARABLE
HEALTH CARE EXPENDITURE ACCOUNT CONTRIBUTIONS
FOR ALL PARTICIPATING EMPLOYEES.—
‘‘(1) IN GENERAL.—An employer meets the re-
quirements of this subsection for any calendar year
if the employer makes available comparable con-
tributions to the health care expenditure accounts of
all comparable participating employees during such
calendar year.
‘‘(2) COMPARABLE CONTRIBUTIONS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), the term ‘comparable contributions’
means contributions which meet the require-
ments of section 125.
‘‘(B) PART-YEAR
EMPLOYEES.—In the
case of an employee who is employed by the em-
ployer for only a portion of the calendar year,
a contribution to the health care expenditure
account of such employee shall be treated as
comparable if it is an amount which bears the
same ratio to the comparable amount (deter-
mined without regard to this subparagraph) as
such portion bears to the entire calendar year.
‘‘(3) COMPARABLE
PARTICIPATING
EMPLOY-
EES.—For purposes of paragraph (1), the term
‘comparable participating employees’ means all em-
ployees who are eligible individuals who have a
health care expenditure account.
‘‘(4) PART-TIME EMPLOYEES.—
‘‘(A) IN
GENERAL.—Paragraph (3) shall
be applied separately with respect to part-time
employees and other employees.
‘‘(B) PART-TIME
EMPLOYEE.—For pur-
poses of subparagraph (A), the term ‘part-time
employee’ means any employee who is custom-
arily employed for fewer than 30 hours per
week.
‘‘(e) CONTROLLED GROUPS.—For purposes of this
section, all persons treated as a single employer under sub-
section (b), (c), (m), or (o) of section 414 shall be treated
as 1 employer.
‘‘(f) DEFINITIONS.—Terms used in this section which
are also used in section 531 have the respective meanings
given such terms in section 531.’’.
(2) CLERICAL AMENDMENT.—The table of sec-
tions for chapter 43 of such Code is amended by
adding after the item relating to section 4980E the
following new item:
‘‘Sec. 4980F. Failure of employer to make comparable medical
savings account contributions.’’.
(j) CONFORMING AND CLERICAL AMENDMENTS.—
(1) Section 220(d)(1)(A) of such Code is
amended by inserting ‘‘or section 531(e)(5)’’ after
‘‘subsection (f)(5)’’.
(2) The table of parts for subchapter F of
chapter 1 of such Code is amended by adding after
the item relating to part VIII the following new
item:
‘‘PART IX—HEALTH CARE EXPENDITURE ACCOUNTS.’’.
(k) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 3. APPLICABILITY OF ERISA TO HEALTH CARE EX-
PENDITURE ACCOUNTS.
(a) ERISA COVERAGE OF HEALTH CARE EXPENDI-
TURE ACCOUNTS.—Section 4 of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1003) is
amended—
(1) by striking ‘‘The provisions of part 7’’ in
subsection (b) and inserting the following:
‘‘(c) The provisions of part 7’’; and
(2) by adding at the end the following new sub-
section:
‘‘(d) In the case of any employee welfare benefit plan
of which a health care expenditure account (within the
meaning of section 531(a) of the Internal Revenue Code
of 1986) forms a part—
‘‘(1) for purposes of applying this title to such
plan in connection with such account, the benefits
provided under such plan shall be deemed to consist
solely of any employer contributions to the account
provided for in the terms of the plan, and
‘‘(2) this title shall not apply with respect to
any health insurance coverage (within the meaning
of section 733(b)) acquired with funds held in such
account.’’.
(b) EXCLUSION
FROM
DEFINITIONS
OF
GROUP
HEALTH PLAN.—
(1) 
CONTINUATION
COVERAGE
REQUIRE-
MENTS.—Section 607(1) of such Act (29 U.S.C.
1167(1)) is amended, in the second sentence, by in-
serting before the period the following: ‘‘or the provi-
sions of any employee welfare benefit plan described
in section 4(d) relating to a health care expenditure
account (within the meaning of section 531(a) of the
Internal Revenue Code of 1986).’’.
(2) HIPAA GROUP
HEALTH
PLAN
REQUIRE-
MENTS.—Section 733(a) of such Act (29 U.S.C.
1191b(a)) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(3) EXCLUSION OF HEALTH CARE EXPENDITURE
ACCOUNT PLANS.—The term ‘group health plan’ excludes
the provisions of any employee welfare benefit plan de-
scribed in section 4(d) relating to a health care expendi-
ture account (within the meaning of section 531(a) of the
Internal Revenue Code of 1986).’’.
(c) LIMITATION ON ERISA PREEMPTION.—Section
514(b) of such Act (29 U.S.C. 1144(b)) is amended—
(1) by redesignating paragraph (9) as para-
graph (10); and
(2) by inserting after paragraph (8) the fol-
lowing new paragraph:
‘‘(9) Nothing in this section shall be construed to
alter, amend, modify, invalidate, impair, or supersede any
provision of State law relating to health insurance cov-
erage (within the meaning of section 733(b)) solely be-
cause such coverage is acquired with funds held in a health
care expenditure account (within the meaning of section
531(a) of the Internal Revenue Code of 1986) forming a
part of an employee welfare benefit plan.’’.
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