cepted in excess of the amount allowed as
a deduction under this section for the tax-
able year.
‘‘(ii) The trustee is a bank (as defined
in section 408(n)) or another person who
demonstrates to the satisfaction of the Sec-
retary that the manner in which such per-
son will administer the trust will be con-
sistent with the requirements of this
section.
‘‘(iii) No part of the trust assets will
be invested in life insurance contracts.
‘‘(iv) The assets of the trust will not
be commingled with other property except
in a common trust fund or common invest-
ment fund.
‘‘(v) The interest of an individual in
the balance in his account is nonforfeit-
able.
‘‘(vi) Under regulations prescribed by
the Secretary, rules similar to the rules of
section 401(a)(9) shall apply to the dis-
tribution of the entire interest of bene-
ficiaries of such trust.
‘‘(B) TREATMENT
OF
COMPARABLE
AC-
COUNTS
HELD
BY
INSURANCE
COMPANIES.—
For purposes of this section, an account held by
an insurance company in the United States
shall be treated as a Medisave account (and
such company shall be treated as a bank) if—
‘‘(i) such account is part of a health
insurance plan that includes a catastrophic
health plan (as defined in subsection
(c)(2)),
‘‘(ii) such account is exclusively for
the purpose of paying the medical expenses
of the beneficiaries of such account who
are covered under such catastrophic health
plan, and
‘‘(iii) the written instrument govern-
ing the account meets the requirements of
clauses (i), (v), and (vi) of subparagraph
(A).
‘‘(2) MEDICAL EXPENSES.—
‘‘(A) IN GENERAL.—The term ‘medical ex-
penses’ means, with respect to an individual,
amounts paid or incurred by such individual
for—
‘‘(i) medical care (as defined in sec-
tion 213), or
‘‘(ii) long-term care (as defined in
paragraph (3)),
for such individual, the spouse of such individ-
ual, 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.
‘‘(B) HEALTH PLAN COVERAGE MAY NOT
BE PURCHASED FROM ACCOUNT.—
‘‘(i) IN
GENERAL.—Such term shall
not include any amount paid for coverage
under a health plan.
‘‘(ii) EXCEPTION.—Clause (i) shall
not apply to coverage of an individual
under a catastrophic health plan or under
a long-term care insurance plan.
‘‘(3) LONG-TERM CARE.—
‘‘(A) IN GENERAL.—The term ‘long-term
care’ means diagnostic, preventive, therapeutic,
rehabilitative, maintenance, or personal care
services which are required by, and provided to,
a chronically ill individual, which have as their
primary purpose the direct provision of needed
assistance with 1 or more activities of daily liv-
ing (or the alleviation of the conditions neces-
sitating such assistance) that the individual is
certified under subparagraph (B) as being un-
able to perform, and which are provided in a
setting other than an acute care unit of a hos-
pital pursuant to a continuing plan of care pre-
scribed by a physician or registered professional
nurse. Such term does not include food or lodg-
ing provided in an institutional or other setting,
or basic living services associated with the
maintenance of a household or participation in
community life, such as case management,
transportation or legal services, or the perform-
ance of home maintenance or household chores.
‘‘(B) CHRONICALLY ILL INDIVIDUAL.—The
term ‘chronically ill individual’ means an indi-
vidual who is certified by a physician or reg-
istered professional nurse as being unable to
perform at least 3 activities of daily living with-
out substantial assistance from another individ-
ual. For purposes of this paragraph, the term
‘activities of daily living’ means bathing, dress-
ing, eating, toileting, transferring, and walking.
‘‘(4) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—A contribution shall be deemed to be made
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 taxable year (not
including extensions thereof).
‘‘(e) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Any amount paid or dis-
tributed out of a Medisave account shall be included
in the gross income of the individual for whose bene-
fit such account was established unless such amount
is used exclusively to pay the 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 Medisave account to the
extent that such contribution exceeds the amount al-
lowable as a deduction under subsection (a) if—
‘‘(A) such distribution is received by the
individual on or before the last day prescribed
by law (including extensions of time) for filing
such individual’s return for such taxable year,
and
‘‘(B) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (B) shall
be included in the gross income of the individual for
the taxable year in which it is received.
‘‘(3) PENALTY FOR DISTRIBUTIONS NOT USED
FOR MEDICAL EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by
this chapter for any taxable year in which there
is a payment or distribution from a Medisave
account which is not used to pay the medical
expenses of the individual for whose benefit the
account was established shall be increased by
10 percent of the amount of such payment or
distribution which is includible in gross income
under paragraph (1).
‘‘(B) ACCOUNT
BALANCE
LIMITATION.—
If—
‘‘(i) the tax imposed by this chapter is
required to be increased under subpara-
graph (A) by reason of a distribution, and
‘‘(ii) after such distribution, the ag-
gregate balance of all Medisave accounts
established for the benefit of the individ-
ual, is less than the amount of the deduct-
ible under the catastrophic health plan cov-
ering such individual,
subparagraph (A) shall be applied by substitut-
ing ‘50 percent’ for ‘10 percent’.
‘‘(4) ROLLOVERS.—Paragraph (1) shall not
apply to any amount paid or distributed out of a
Medisave account to the individual for whose benefit
the account is maintained if the entire amount re-
ceived (including money and any other property) is
paid into another Medisave account for the benefit
of such individual not later than the 60th day after
the day on which he received the payment or dis-
tribution.
‘‘(f) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) EXEMPTION
FROM
TAX.—Any Medisave
account is exempt from taxation under this subtitle
unless such account has ceased to be a Medisave ac-
count by reason of paragraph (2) or (3). Notwith-
standing the preceding sentence, any such account
shall be subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business
income of charitable, etc. organizations).
‘‘(2) ACCOUNT TERMINATES IF INDIVIDUAL EN-
GAGES IN PROHIBITED TRANSACTION.—
‘‘(A) IN GENERAL.—If, during any taxable
year of the individual for whose benefit the
Medisave account was established, such individ-
ual engages in any transaction prohibited by
section 4975 with respect to the account, the
account ceases to be a Medisave 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 Medisave account by rea-
son of subparagraph (A) on the first day of any
taxable year, paragraph (1) of subsection (e)
shall be applied 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) and no portion
of such distribution were used to pay medical
expenses.
‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU-
RITY.—If, during any taxable year, the individual for
whose benefit a Medisave account was established
uses the account or any portion thereof as security
for a loan, the portion so used is treated as distrib-
uted to that individual and not used to pay medical
expenses.
‘‘(g) CUSTODIAL ACCOUNTS.—For purposes of this
section, a custodial account shall be treated as a trust if—
‘‘(1) the assets of such account are held by a
bank (as defined in section 408(n)) or another per-
son who demonstrates to the satisfaction of the Sec-
retary that the manner in which he will administer
the account will be consistent with the requirements
of this section, and
‘‘(2) the custodial account would, except for the
fact that it is not a trust, constitute a Medisave ac-
count described in subsection (d).
For purposes of this title, in the case of a custodial ac-
count treated as a trust by reason of the preceding sen-
tence, the custodian of such account shall be treated as
the trustee thereof.
‘‘(h) REPORTS.—The trustee of a Medisave account
shall make such reports regarding such account to the
Secretary and to the individual for whose benefit the ac-
count 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 WHETHER OR NOT INDI-
VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a)
of section 62 of such Code is amended by inserting after
paragraph (15) the following new paragraph:
‘‘(16) MEDISAVE
ACCOUNTS.—The deduction
allowed by section 220.’’
(c) DISTRIBUTIONS FROM MEDISAVE ACCOUNTS
NOT ALLOWED AS MEDICAL EXPENSE DEDUCTION.—
Section 213 of such Code is amended by adding at the
end thereof the following new subsection:
‘‘(f) COORDINATION WITH MEDISAVE ACCOUNTS.—
The amount otherwise taken into account under sub-
section (a) as expenses paid for medical care shall be re-
duced by the amount (if any) of the distributions from
any Medisave account of the taxpayer during the taxable
year which is not includible in gross income by reason of
being used for medical care.’’
(d) EXCLUSION OF EMPLOYER CONTRIBUTIONS TO
MEDISAVE 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 reasonable to be-
lieve that a corresponding deduction 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
payment of such remuneration it is reasonable to be-
lieve that a corresponding deduction is allowable
under section 220 of the Internal Revenue Code of
1986.’’
(2) RAILROAD RETIREMENT TAX.—Subsection
(e) of section 3231 of such Code is amended by add-
ing at the end thereof the following new paragraph:
‘‘(10) 
EMPLOYER
CONTRIBUTIONS
TO
MEDISAVE
ACCOUNTS.—The term ‘compensation’
shall not include any payment made to or on behalf