717
‘‘(i) the aggregate contributions to
such account which were allowed as a de-
duction under this section or which were
excluded under section 106(b), over
‘‘(ii) the aggregate prior payments or
distributions from such account which were
includible in gross income under this para-
graph.
‘‘(B) SPECIAL
RULES.—For purposes of
subparagraph (A)—
‘‘(i) all medical savings accounts of
the account holder shall be treated as 1 ac-
count,
‘‘(ii) all payments and distributions
during any taxable year shall be treated as
1 distribution, and
‘‘(iii) any distribution of property
shall be taken into account at its fair mar-
ket value on the date of the distribution.
‘‘(2) PENALTY FOR DISTRIBUTIONS NOT USED
FOR QUALIFIED 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 medical
savings account which is not used exclusively to
718
pay the qualified medical expenses of the ac-
count holder shall be increased by 10 percent of
the amount of such payment or distribution
which is includible in gross income under para-
graph (1).
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A)
shall not apply if the payment or distribution is
made on or after the date the account holder—
‘‘(i) attains age 59 1⁄2,
‘‘(ii) becomes disabled within the
meaning of section 72(m)(7), or
‘‘(iii) dies.
‘‘(3) WITHDRAWAL
OF
EXCESS
CONTRIBU-
TIONS.—Paragraph (1) shall not apply to the dis-
tribution of any contribution paid during a taxable
year to a medical savings account 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 this
section with respect to such contribution, and
‘‘(C) such distribution is accompanied by
the amount of net income attributable to such
contribution.
719
In the case of such a distribution, for purposes of section
61, any net income described in subparagraph (C) shall
be deemed to have been earned and receivable in the tax-
able year in which such contribution is made.
‘‘(4) ROLLOVERS.—Paragraph (1) shall not
apply to any amount paid or distributed out of a
medical savings account to the account holder if the
entire amount received (including money and any
other property) is paid into another medical savings
account for the benefit of such holder not later than
the 60th day after the day on which he received the
payment or distribution.
‘‘(5) COORDINATION WITH MEDICAL EXPENSE
DEDUCTION.—For purposes of section 213, any pay-
ment or distribution out of a medical savings ac-
count for qualified medical expenses shall not be
treated as an expense paid for medical care to the
extent of the amount of such payment or distribu-
tion which is excludable from gross income solely by
reason of paragraph (1)(A).
‘‘(g) COST-OF-LIVING ADJUSTMENT.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1996, each
dollar amount in subsection (b)(1) or in subsection
(c)(2) shall be increased by an amount equal to—
720
‘‘(A) such dollar amount, multiplied by
‘‘(B) the medical care cost adjustment for
such calendar year.
If any increase under the preceding sentence is not
a multiple of $50, such increase shall be rounded to
the nearest multiple of $50.
‘‘(2) MEDICAL CARE COST ADJUSTMENT.—For
purposes of paragraph (1), the medical care cost ad-
justment for any calendar year is the percentage (if
any) by which—
‘‘(A) the medical care component of the
Consumer Price Index (as defined in section
1(f)(5)) for August of the preceding calendar
year, exceeds
‘‘(B) such component for August of 1995.
‘‘(h) REPORTS.—The trustee of a medical savings ac-
count shall make such reports regarding such account to
the Secretary and to the account holder with respect to
contributions, distributions, and such other matters as the
Secretary may require under regulations. The reports re-
quired 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 reg-
ulations.’’
721
(b) DEDUCTION ALLOWED WHETHER OR NOT INDI-
VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a)
of section 62 is amended by inserting after paragraph (15)
the following new paragraph:
‘‘(16) MEDICAL SAVINGS ACCOUNTS.—The de-
duction allowed by section 220.’’
(c) EXCLUSIONS FOR EMPLOYER CONTRIBUTIONS TO
MEDICAL SAVINGS ACCOUNTS.—
(1) EXCLUSION FROM INCOME TAX.—The text
of section 106 (relating to contributions by employer
to accident and health plans) is amended to read as
follows:
‘‘(a) GENERAL RULE.—Gross income of an employee
does not include employer-provided coverage under an ac-
cident or health plan.
‘‘(b) CONTRIBUTIONS
TO MEDICAL SAVINGS AC-
COUNTS.—
‘‘(1) IN GENERAL.—In the case of an employee
who is an eligible individual, gross income does not
include amounts contributed by such employee’s em-
ployer to any medical savings account of such em-
ployee.
‘‘(2) COORDINATION WITH DEDUCTION LIMITA-
TION.—The amount excluded from the gross income
of an employee under this subsection for any taxable
722
year shall not exceed the limitation under section
220(b)(1) (determined without regard to this sub-
section) which is applicable to such employee for
such taxable year.’’
‘‘(3) NO CONSTRUCTIVE RECEIPT.—No amount
shall be included in the gross income of any em-
ployee solely because the employee may choose be-
tween the contributions referred to in paragraph (1)
and employer contributions to another health plan of
the employer.
‘‘(4) SPECIAL RULE FOR DEDUCTION OF EM-
PLOYER CONTRIBUTIONS.—Any employer contribu-
tion to a medical savings account, if otherwise allow-
able as a deduction under this chapter, shall be al-
lowed only for the taxable year in which paid.
‘‘(5) DEFINITIONS.—For purposes of this sub-
section, the terms ‘eligible individual’ and ‘medical
savings account’ have the respective meanings given
to such terms by section 220.’’
(2) EXCLUSION FROM EMPLOYMENT TAXES.—
(A) SOCIAL SECURITY TAXES.—
(i) Subsection (a) of section 3121 is
amended by striking ‘‘or’’ at the end of
paragraph (20), by striking the period at
the end of paragraph (21) and inserting ‘‘;
729
cal year beginning in such calendar year.
Any such report shall contain full and sub-
stantive analysis, in addition to statistical
information.
‘‘(ii) ACTIVITIES.—Not later than De-
cember 31 of each calendar year after
1995, the Taxpayer Advocate shall report
to the Committee on Ways and Means of
the House of Representatives and the
Committee on Finance of the Senate on
the activities of the Taxpayer Advocate
during the fiscal year ending during such
calendar year. Any such report shall con-
tain full and substantive analysis, in addi-
tion to statistical information, and shall—
‘‘(I) identify the initiatives the
Taxpayer Advocate has taken on im-
proving taxpayer services and Internal
Revenue Service responsiveness,
‘‘(II) contain recommendations
received from individuals with the au-
thority to issue Taxpayer Assistance
Orders under section 7811,
‘‘(III) contain a summary of at
least 20 of the most serious problems
829
by the person acquiring such property, such
agreement shall terminate and any gain which
was not recognized by reason of such agreement
shall be recognized as of the date of such dis-
position.
‘‘(D) SECRETARY MAY EXTEND PERIOD.—
To the extent provided in regulations prescribed
by the Secretary, subparagraph (B) shall be ap-
plied by substituting the 15-year period begin-
ning 5 years before the loss of United States
citizenship for the 10-year period referred to
therein.
‘‘(E) SECRETARY MAY REQUIRE RECOGNI-
TION OF GAIN IN CERTAIN CASES.—To the ex-
tent provided in regulations prescribed by the
Secretary—
‘‘(i) the removal of appreciated tan-
gible personal property from the United
States, and
‘‘(ii) any other occurrence which
(without recognition of gain) results in a
change in the source of the income or gain
from property from sources within the
United States to sources outside the Unit-
ed States,