263
Subtitle A—Medical Savings
Accounts
SEC. 301. MEDICAL SAVINGS ACCOUNTS.
(a) IN GENERAL.—Part VII of subchapter B of chap-
ter 1 (relating to additional itemized deductions for indi-
viduals) is amended by redesignating section 220 as sec-
tion 221 and by inserting after section 219 the following
new section:
‘‘SEC. 220. MEDICAL SAVINGS ACCOUNTS.
‘‘(a) DEDUCTION ALLOWED.—In the case of an indi-
vidual who is an eligible individual for any month during
the taxable year, there shall be allowed as a deduction for
the taxable year an amount equal to the aggregate amount
paid in cash during such taxable year by such individual
to a medical savings account of such individual.
‘‘(b) LIMITATIONS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the amount allowable as a
deduction under subsection (a) to an individual for
the taxable year shall not exceed—
‘‘(A) except as provided in subparagraph
(B), the lesser of—
‘‘(i) $2,000, or
264
‘‘(ii) the annual deductible limit for
any individual covered under the high de-
ductible health plan, or
‘‘(B) in the case of a high deductible
health plan covering the taxpayer and any other
eligible individual who is the spouse or any de-
pendent (as defined in section 152) of the tax-
payer, the lesser of—
‘‘(i) $4,000, or
‘‘(ii) the annual limit under the plan
on the aggregate amount of deductibles re-
quired to be paid by all individuals.
The preceding sentence shall not apply if the spouse
of such individual is covered under any other high
deductible health plan.
‘‘(2) SPECIAL
RULE
FOR
MARRIED
INDIVID-
UALS.—
‘‘(A) IN GENERAL.—This subsection shall
be applied separately for each married individ-
ual.
‘‘(B) SPECIAL RULE.—If individuals who
are married to each other are covered under the
same high deductible health plan, then the
amounts applicable under paragraph (1)(B)
265
shall be divided equally between them unless
they agree on a different division.
‘‘(3) COORDINATION WITH EXCLUSION FOR EM-
PLOYER CONTRIBUTIONS.—No deduction shall be al-
lowed under this section for any amount paid for
any taxable year to a medical savings account of an
individual if—
‘‘(A) any amount is paid to any medical
savings account of such individual which is ex-
cludable from gross income under section
106(b) for such year, or
‘‘(B) in a case described in paragraph
(2)(B), any amount is paid to any medical sav-
ings account of either spouse which is so ex-
cludable for such year.
‘‘(4) PRORATION OF LIMITATION.—
‘‘(A) IN GENERAL.—The limitation under
paragraph (1) shall be the sum of the monthly
limitations for months during the taxable year
that the individual is an eligible individual if—
‘‘(i) such individual is not an eligible
individual for all months of the taxable
year,
‘‘(ii) the deductible under the high de-
ductible health plan covering such individ-
266
ual is not the same throughout such tax-
able year, or
‘‘(iii) such limitation is determined
under paragraph (1)(B) for some but not
all months during such taxable year.
‘‘(B) MONTHLY LIMITATION.—The month-
ly limitation for any month shall be an amount
equal to 1⁄12 of the limitation which would (but
for this paragraph and paragraph (3)) be deter-
mined under paragraph (1) if the facts and cir-
cumstances as of the first day of such month
that such individual is covered under a high de-
ductible health plan were true for the entire
taxable year.
‘‘(5) DENIAL
OF
DEDUCTION
TO
DEPEND-
ENTS.—No deduction shall be allowed under this
section to any individual with respect to whom a de-
duction under section 151 is allowable to another
taxpayer for a taxable year beginning in the cal-
endar year in which such individual’s taxable year
begins.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) ELIGIBLE INDIVIDUAL.—
267
‘‘(A) IN GENERAL.—The term ‘eligible in-
dividual’ means, with respect to any month, any
individual—
‘‘(i) who is covered under a high de-
ductible health plan as of the 1st day of
such month, and
‘‘(ii) who is not, while covered under
a high deductible health plan, covered
under any health plan—
‘‘(I) which is not a high deduct-
ible health plan, and
‘‘(II) which provides coverage for
any benefit which is covered under the
high deductible health plan.
‘‘(B) 
CERTAIN
COVERAGE
DIS-
REGARDED.—Subparagraph (A)(ii) shall be ap-
plied without regard to—
‘‘(i) coverage for any benefit provided
by permitted insurance, and
‘‘(ii) coverage (whether through insur-
ance or otherwise) for accidents, disability,
dental care, vision care, or long-term care.
‘‘(2) HIGH DEDUCTIBLE HEALTH PLAN.—The
term ‘high deductible health plan’ means a health
plan which—
268
‘‘(A) has an annual deductible limit for
each individual covered by the plan which is not
less than $1,500, and
‘‘(B) has an annual limit on the aggregate
amount of deductibles required to be paid with
respect to all individuals covered by the plan
which is not less than $3,000.
Such term does not include a health plan if substan-
tially all of its coverage is coverage described in
paragraph (1)(B). A plan shall not fail to be treated
as a high deductible health plan by reason of failing
to have a deductible for preventive care if the ab-
sence of a deductible for such care is required by
State law.
‘‘(3) PERMITTED INSURANCE.—The term ‘per-
mitted insurance’ means—
‘‘(A) Medicare supplemental insurance,
‘‘(B) insurance if substantially all of the
coverage provided under such insurance relates
to—
‘‘(i) liabilities incurred under workers’
compensation laws,
‘‘(ii) tort liabilities,
‘‘(iii) liabilities relating to ownership
or use of property, or
269
‘‘(iv) such other similar liabilities as
the Secretary may specify by regulations,
‘‘(C) insurance for a specified disease or
illness, and
‘‘(D) insurance paying a fixed amount per
day (or other period) of hospitalization.
‘‘(d) MEDICAL SAVINGS ACCOUNT.—For purposes 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 account holder, but only if the written governing
instrument creating the trust meets the following re-
quirements:
‘‘(A) Except in the case of a rollover con-
tribution described in subsection (f)(5), no con-
tribution will be accepted—
‘‘(i) unless it is in cash, or
‘‘(ii) to the extent such contribution,
when added to previous contributions to
the trust for the calendar year, exceeds
$4,000.
‘‘(B) The trustee is a bank (as defined in
section 408(n)), an insurance company (as de-
270
fined in section 816), or another person who
demonstrates to the satisfaction of the Sec-
retary that the manner in which such person
will administer the trust will be consistent with
the requirements 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.
‘‘(E) The interest of an individual in the
balance in his account is nonforfeitable.
‘‘(2) QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
medical expenses’ means, with respect to an ac-
count 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 defined in section 152)
of such individual, but only to the extent such
amounts are not compensated for by insurance
or otherwise.
‘‘(B) HEALTH
INSURANCE
MAY
NOT
BE
PURCHASED FROM ACCOUNT.—
271
‘‘(i) IN GENERAL.—Subparagraph (A)
shall not apply to any payment for insur-
ance.
‘‘(ii) EXCEPTIONS.—Clause (i) shall
not apply to any expense for coverage
under—
‘‘(I) a health plan during any pe-
riod of continuation coverage required
under any Federal law,
‘‘(II) a qualified long-term care
insurance contract (as defined in sec-
tion 7702B(b)), or
‘‘(III) a health plan during a pe-
riod in which the individual is receiv-
ing 
unemployment 
compensation
under any Federal or State law.
‘‘(3) ACCOUNT
HOLDER.—The term ‘account
holder’ means the individual on whose behalf the
medical savings account was established.
‘‘(4) CERTAIN RULES TO APPLY.—Rules similar
to the following rules shall apply for purposes of this
section:
‘‘(A) Section 219(d)(2) (relating to no de-
duction for rollovers).
272
‘‘(B) Section 219(f)(3) (relating to time
when contributions deemed made).
‘‘(C) Except as provided in section 106(b),
section 219(f)(5) (relating to employer pay-
ments).
‘‘(D) Section 408(g) (relating to commu-
nity property laws).
‘‘(E) Section 408(h) (relating to custodial
accounts).
‘‘(e) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) IN GENERAL.—A medical savings account
is exempt from taxation under this subtitle unless
such account has ceased to be a medical savings ac-
count by reason of paragraph (2) or (3). Notwith-
standing 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. organizations).
‘‘(2) ACCOUNT TERMINATIONS.—Rules similar
to the rules of paragraphs (2) and (4) of section
408(e) shall apply to medical savings accounts, and
any amount treated as distributed under such rules
shall be treated as not used to pay qualified medical
expenses.
‘‘(f) TAX TREATMENT OF DISTRIBUTIONS.—
273
‘‘(1) AMOUNTS USED FOR QUALIFIED MEDICAL
EXPENSES.—
‘‘(A) IN GENERAL.—Any amount paid or
distributed out of a medical savings account
which is used exclusively to pay qualified medi-
cal expenses of any account holder (or any
spouse or dependent of the holder) shall not be
includible in gross income.
‘‘(B) TREATMENT AFTER DEATH OF AC-
COUNT HOLDER.—
‘‘(i) 
TREATMENT
IF
HOLDER
IS
SPOUSE.—If, after the death of the ac-
count holder, the account holder’s interest
is payable to (or for the benefit of) the
holder’s spouse, the medical savings ac-
count shall be treated as if the spouse were
the account holder.
‘‘(ii) TREATMENT
IF
DESIGNATED
HOLDER IS NOT SPOUSE.—In the case of
an account holder’s interest in a medical
savings account which is payable to (or for
the benefit of) any person other than such
holder’s spouse upon the death of such
holder—
274
‘‘(I) such account shall cease to
be a medical savings account as of the
date of death, and
‘‘(II) an amount equal to the fair
market value of the assets in such ac-
count on such date shall be includible
if such person is not the estate of
such holder, in such person’s gross in-
come for the taxable year which in-
cludes such date, or if such person is
the estate of such holder, in such
holder’s gross income for the last tax-
able year of such holder.
‘‘(2) INCLUSION OF AMOUNTS NOT USED FOR
QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN GENERAL.—Any amount paid or
distributed out of a medical savings account
which is not used exclusively to pay the quali-
fied medical expenses of the account holder or
of the spouse or dependents of such holder shall
be included in the gross income of such holder.
‘‘(B) SPECIAL
RULES.—For purposes of
subparagraph (A)—
275
‘‘(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.
‘‘(3) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—If the aggregate con-
tributions (other than rollover contributions) for a
taxable year to the medical savings accounts of an
individual exceed the amount allowable as a deduc-
tion under this section for such contributions, para-
graph (2) shall not apply to distributions from such
accounts (in an amount not greater than such ex-
cess) 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
276
‘‘(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.
‘‘(4) PENALTY FOR 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 medical savings account of
such holder which is includible in gross income
under paragraph (2) shall be increased by 10
percent of the amount which is so includible.
‘‘(B) EXCEPTION
FOR
DISABILITY
OR
DEATH.—Subparagraph (A) shall not apply if
the payment or distribution is made after the
account holder becomes disabled within the
meaning of section 72(m)(7) or dies.
‘‘(C) 
EXCEPTION
FOR
DISTRIBUTIONS
AFTER AGE 591⁄2.—Subparagraph (A) shall not
apply to any payment or distribution after the
date on which the account holder attains age
591⁄2.
277
‘‘(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 medical savings account to the account
holder to the extent the amount received is paid
into a medical savings account for the benefit
of such holder not later than the 60th day after
the day on which the holder receives the pay-
ment or distribution.
‘‘(B) LIMITATION.—This paragraph shall
not apply to any amount described in subpara-
graph (A) received by an individual from a
medical savings account if, at any time during
the 1-year period ending on the day of such re-
ceipt, such individual received any other amount
described in subparagraph (A) from a medical
savings account which was not includible in the
individual’s gross income because of the appli-
cation of this paragraph.
‘‘(6) COORDINATION WITH MEDICAL EXPENSE
DEDUCTION.—For purposes of determining the
amount of the deduction under section 213, any pay-
278
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.
‘‘(7) TRANSFER OF ACCOUNT INCIDENT TO DI-
VORCE.—The transfer of an individual’s interest in
a medical savings account to an individual’s spouse
or former spouse under a divorce or separation in-
strument described in subparagraph (A) of section
71(b)(2) shall not be considered a taxable transfer
made by such individual notwithstanding any other
provision of this subtitle, and such interest shall,
after such transfer, be treated as a medical savings
account with respect to which the spouse is the ac-
count holder.
‘‘(g) COST-OF-LIVING ADJUSTMENT.—
‘‘(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1997, each
dollar amount in subsection (b)(1), (c)(2), or
(d)(1)(A) shall be increased by an amount equal
to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the medical care cost adjustment for
such calendar year.
279
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 1996.
‘‘(h) REPORTS.—The Secretary may require the
trustee of a medical savings account to make such reports
regarding such account to the Secretary and to the ac-
count holder with respect to contributions, distributions,
and such other matters as the Secretary determines appro-
priate. 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 is amended by inserting after paragraph (15)
the following new paragraph:
280
‘‘(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.—Except as otherwise provided
in this section, gross income of an employee does not in-
clude employer-provided coverage under an accident 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
year shall not exceed the limitation under section
220(b)(1) (determined without regard to this sub-
281
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 ‘‘;
or’’, and by inserting after paragraph (21)
the following new paragraph:
282
‘‘(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(b).’’
(ii) 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 para-
graph (18) and inserting ‘‘; or’’, and by in-
serting after paragraph (18) the following
new paragraph:
‘‘(19) 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(b) of the Internal Revenue Code of 1986.’’
(B) RAILROAD
RETIREMENT
TAX.—Sub-
section (e) of section 3231 is amended by add-
ing at the end the following new paragraph:
‘‘(10) MEDICAL SAVINGS ACCOUNT CONTRIBU-
TIONS.—The term ‘compensation’ shall not include
any payment made to or for the benefit of an em-
ployee if at the time of such payment it is reason-
able to believe that the employee will be able to ex-
283
clude such payment from income under section
106(b).’’
(C) UNEMPLOYMENT TAX.—Subsection (b)
of section 3306 is amended by striking ‘‘or’’ at
the end of paragraph (15), by striking the pe-
riod at the end of paragraph (16) and inserting
‘‘; or’’, and by inserting after paragraph (16)
the following new paragraph:
‘‘(17) 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(b).’’
(D) WITHHOLDING
TAX.—Subsection (a)
of section 3401 is amended by striking ‘‘or’’ at
the end of paragraph (19), by striking the pe-
riod at the end of paragraph (20) and inserting
‘‘; or’’, and by inserting after paragraph (20)
the following new paragraph:
‘‘(21) 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(b).’’
284
(d) MEDICAL SAVINGS ACCOUNT CONTRIBUTIONS
NOT AVAILABLE UNDER CAFETERIA PLANS.—Subsection
(f) of section 125 of such Code is amended by inserting
‘‘106(b),’’ before ‘‘117’’.
(e) EXCLUSION
OF MEDICAL SAVINGS ACCOUNTS
FROM ESTATE TAX.—Part IV of subchapter A of chapter
11 is amended by adding at the end the following new
section:
‘‘SEC. 2057. MEDICAL SAVINGS ACCOUNTS.
‘‘For purposes of the tax imposed by section 2001,
the value of the taxable estate shall be determined by de-
ducting from the value of the gross estate an amount
equal to the value of any medical savings account (as de-
fined in section 220(d)) included in the gross estate.’’
(f) TAX ON EXCESS CONTRIBUTIONS.—Section 4973
(relating to tax on excess contributions to individual re-
tirement accounts, certain section 403(b) contracts, and
certain individual retirement annuities) is amended—
(1) by inserting ‘‘MEDICAL
SAVINGS
AC-
COUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading of
such section,
(2) by striking ‘‘or’’ at the end of paragraph
(1) of subsection (a),
285
(3) by redesignating paragraph (2) of sub-
section (a) as paragraph (3) and by inserting after
paragraph (1) the following:
‘‘(2) a medical savings account (within the
meaning of section 220(d)), or’’, and
(4) by adding at the end the following new sub-
section:
‘‘(d) EXCESS CONTRIBUTIONS TO MEDICAL SAVINGS
ACCOUNTS.—For purposes of this section, in the case of
a medical savings accounts (within the meaning of section
220(d)), the term ‘excess contributions’ means the sum
of—
‘‘(1) the amount by which the amount contrib-
uted for the taxable year to the accounts (other than
rollover contributions described in section 220(f)(5))
exceeds the amount allowable as a deduction under
section 220 for such contributions, and
‘‘(2) the amount determined under this sub-
section for the preceding taxable year, reduced by
the sum of distributions out of the account included
in gross income under section 220(f) (2) or (3) and
the excess (if any) of the maximum amount allow-
able as a deduction under section 220 for the tax-
able year over the amount contributed to the ac-
counts.
286
For purposes of this subsection, any contribution which
is distributed out of the medical savings account in a dis-
tribution to which section 220(f)(3) applies shall be treat-
ed as an amount not contributed.’’
(g) TAX ON PROHIBITED TRANSACTIONS.—
(1) Section 4975 (relating to tax on prohibited
transactions) is amended by adding at the end of
subsection (c) the following new paragraph:
‘‘(4) SPECIAL RULE FOR MEDICAL SAVINGS AC-
COUNTS.—An individual for whose benefit a medical
savings account (within the meaning of section
220(d)) is established shall be exempt from the tax
imposed by this section with respect to any trans-
action concerning such account (which would other-
wise be taxable under this section) if, with respect
to such transaction, the account ceases to be a medi-
cal savings account by reason of the application of
section 220(e)(2) to such account.’’
(2) Paragraph (1) of section 4975(e) is amend-
ed to read as follows:
‘‘(1) PLAN.—For purposes of this section, the
term ‘plan’ means—
‘‘(A) a trust described in section 401(a)
which forms a part of a plan, or a plan de-
287
scribed in section 403(a), which trust or plan is
exempt from tax under section 501(a),
‘‘(B) an individual retirement account de-
scribed in section 408(a),
‘‘(C) an individual retirement annuity de-
scribed in section 408(b),
‘‘(D) a medical savings account described
in section 220(d), or
‘‘(E) a trust, plan, account, or annuity
which, at any time, has been determined by the
Secretary to be described in any preceding sub-
paragraph of this paragraph.’’
(h) FAILURE TO PROVIDE REPORTS ON MEDICAL
SAVINGS ACCOUNTS.—
(1) Subsection (a) of section 6693 (relating to
failure to provide reports on individual retirement
accounts or annuities) is amended to read as follows:
‘‘(a) REPORTS.—
‘‘(1) IN GENERAL.—If a person required to file
a report under a provision referred to in paragraph
(2) fails to file such report at the time and in the
manner required by such provision, such person
shall pay a penalty of $50 for each failure unless it
is shown that such failure is due to reasonable
cause.
288
‘‘(2) PROVISIONS.—The provisions referred to
in this paragraph are—
‘‘(A) subsections (i) and (l) of section 408
(relating to individual retirement plans), and
‘‘(B) section 220(h) (relating to medical
savings accounts).’’
(i) EXCEPTION FROM CAPITALIZATION OF POLICY
ACQUISITION EXPENSES.—Subparagraph (B) of section
848(e)(1) (defining specified insurance contract) is
amended by striking ‘‘and’’ at the end of clause (ii), by
striking the period at the end of clause (iii) and inserting
‘‘, and’’, and by adding at the end the following new
clause:
‘‘(iv) any contract which is a medical
savings account (as defined in section
220(d)).’’.
(j) CLERICAL AMENDMENTS.—
(1) The table of sections for part VII of sub-
chapter B of chapter 1 is amended by striking the
last item and inserting the following:
‘‘Sec. 220. Medical savings accounts.
‘‘Sec. 221. Cross reference.’’
(2) The table of sections for part IV of sub-
chapter A of chapter 11 is amended by adding at
the end the following new item:
‘‘Sec. 2057. Medical savings accounts.’’
289
(k) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1996.
Subtitle B—Increase in Deduction
for Health Insurance Costs of
Self-Employed Individuals
SEC. 311. INCREASE IN DEDUCTION FOR HEALTH INSUR-
ANCE COSTS OF SELF-EMPLOYED INDIVID-
UALS.
(a) IN GENERAL.—Paragraph (1) of section 162(l)
is amended to read as follows:
‘‘(1) ALLOWANCE OF DEDUCTION.—
‘‘(A) IN GENERAL.—In the case of an indi-
vidual who is an employee within the meaning
of section 401(c)(1), there shall be allowed as
a deduction under this section an amount equal
to the applicable percentage of the amount paid
during the taxable year for insurance which
constitutes medical care for the taxpayer, his
spouse, and dependents.
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of subparagraph (A), the applicable
percentage shall be determined under the fol-
lowing table:
‘‘For taxable years beginning
The applicable
in calendar year—
percentage is—
1998 ...........................................................
35 percent
290
1999, 2000, or 2001 ..................................
40 percent
2002 ...........................................................
45 percent
2003 or thereafter .....................................
50 percent.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle C—Long-Term Care
Services and Contracts
PART I—GENERAL PROVISIONS
SEC. 321. TREATMENT OF LONG-TERM CARE INSURANCE.
(a) GENERAL RULE.—Chapter 79 (relating to defini-
tions) is amended by inserting after section 7702A the fol-
lowing new section:
‘‘SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE
INSURANCE.
‘‘(a) IN GENERAL.—For purposes of this title—
‘‘(1) a qualified long-term care insurance con-
tract shall be treated as an accident and health in-
surance contract,
‘‘(2) amounts (other than policyholder divi-
dends, as defined in section 808, or premium re-
funds) received under a qualified long-term care in-
surance contract shall be treated as amounts re-
ceived for personal injuries and sickness and shall be
treated as reimbursement for expenses actually in-
curred for medical care (as defined in section
213(d)),
291
‘‘(3) any plan of an employer providing cov-
erage under a qualified long-term care insurance
contract shall be treated as an accident and health
plan with respect to such coverage,
‘‘(4) except as provided in subsection (e)(3),
amounts paid for a qualified long-term care insur-
ance contract providing the benefits described in
subsection (b)(2)(A) shall be treated as payments
made for insurance for purposes of section
213(d)(1)(D), and
‘‘(5) a qualified long-term care insurance con-
tract shall be treated as a guaranteed renewable con-
tract subject to the rules of section 816(e).
‘‘(b) QUALIFIED
LONG-TERM
CARE
INSURANCE
CONTRACT.—For purposes of this title—
‘‘(1) IN GENERAL.—The term ‘qualified long-
term care insurance contract’ means any insurance
contract if—
‘‘(A) the only insurance protection pro-
vided under such contract is coverage of quali-
fied long-term care services,
‘‘(B) such contract does not pay or reim-
burse expenses incurred for services or items to
the extent that such expenses are reimbursable
under title XVIII of the Social Security Act or
292
would be so reimbursable but for the applica-
tion of a deductible or coinsurance amount,
‘‘(C) such contract is guaranteed renew-
able,
‘‘(D) such contract does not provide for a
cash surrender value or other money that can
be—
‘‘(i) paid, assigned, or pledged as col-
lateral for a loan, or
‘‘(ii) borrowed,
other than as provided in subparagraph (E) or
paragraph (2)(C),
‘‘(E) all refunds of premiums, and all pol-
icyholder dividends or similar amounts, under
such contract are to be applied as a reduction
in future premiums or to increase future bene-
fits, and
‘‘(F) such contract meets the requirements
of subsection (f).
‘‘(2) SPECIAL RULES.—
‘‘(A) PER
DIEM, ETC. PAYMENTS
PER-
MITTED.—A contract shall not fail to be de-
scribed in subparagraph (A) or (B) of para-
graph (1) by reason of payments being made on
a per diem or other periodic basis without re-
293
gard to the expenses incurred during the period
to which the payments relate.
‘‘(B) SPECIAL RULES RELATING TO MEDI-
CARE.—
‘‘(i) Paragraph (1)(B) shall not apply
to expenses which are reimbursable under
title XVIII of the Social Security Act only
as a secondary payor.
‘‘(ii) No provision of law shall be con-
strued or applied so as to prohibit the of-
fering of a qualified long-term care insur-
ance contract on the basis that the con-
tract coordinates its benefits with those
provided under such title.
‘‘(C) REFUNDS OF PREMIUMS.—Paragraph
(1)(E) shall not apply to any refund on the
death of the insured, or on a complete surren-
der or cancellation of the contract, which can-
not exceed the aggregate premiums paid under
the contract. Any refund on a complete surren-
der or cancellation of the contract shall be in-
cludible in gross income to the extent that any
deduction or exclusion was allowable with re-
spect to the premiums.
294
‘‘(c) QUALIFIED LONG-TERM CARE SERVICES.—For
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified long-
term care services’ means necessary diagnostic, pre-
ventive, therapeutic, curing, treating, mitigating, and
rehabilitative services, and maintenance or personal
care services, which—
‘‘(A) are required by a chronically ill indi-
vidual, and
‘‘(B) are provided pursuant to a plan of
care prescribed by a licensed health care practi-
tioner.
‘‘(2) CHRONICALLY ILL INDIVIDUAL.—
‘‘(A) IN GENERAL.—The term ‘chronically
ill individual’ means any individual who has
been certified by a licensed health care practi-
tioner as—
‘‘(i) being unable to perform (without
substantial assistance from another indi-
vidual) at least 2 activities of daily living
for a period of at least 90 days due to a
loss of functional capacity,
‘‘(ii) having a level of disability simi-
lar (as determined by the Secretary in con-
sultation with the Secretary of Health and
295
Human Services) to the level of disability
described in clause (i), or
‘‘(iii) requiring substantial supervision
to protect such individual from threats to
health and safety due to severe cognitive
impairment.
Such term shall not include any individual oth-
erwise meeting the requirements of the preced-
ing sentence unless within the preceding 12-
month period a licensed health care practitioner
has certified that such individual meets such re-
quirements.
‘‘(B) ACTIVITIES OF DAILY LIVING.—For
purposes of subparagraph (A), each of the fol-
lowing is an activity of daily living:
‘‘(i) Eating.
‘‘(ii) Toileting.
‘‘(iii) Transferring.
‘‘(iv) Bathing.
‘‘(v) Dressing.
‘‘(vi) Continence.
Nothing in this section shall be construed to re-
quire a contract to take into account all of the
preceding activities of daily living.
296
‘‘(3) MAINTENANCE OR PERSONAL CARE SERV-
ICES.—The term ‘maintenance or personal care serv-
ices’ means any care the primary purpose of which
is the provision of needed assistance with any of the
disabilities as a result of which the individual is a
chronically ill individual (including the protection
from threats to health and safety due to severe cog-
nitive impairment).
‘‘(4) 
LICENSED
HEALTH
CARE
PRACTI-
TIONER.—The term ‘licensed health care practi-
tioner’ means any physician (as defined in section
1861(r)(1) of the Social Security Act) and any reg-
istered professional nurse, licensed social worker, or
other individual who meets such requirements as
may be prescribed by the Secretary.
‘‘(d) AGGREGATE PAYMENTS IN EXCESS OF LIM-
ITS.—
‘‘(1) IN GENERAL.—If the aggregate amount of
periodic payments under all qualified long-term care
insurance contracts with respect to an insured for
any period exceeds the dollar amount in effect for
such period under paragraph (3), such excess pay-
ments shall be treated as made for qualified long-
term care services only to the extent of the costs in-
curred by the payee (not otherwise compensated for
297
by insurance or otherwise) for qualified long-term
care services provided during such period for such
insured.
‘‘(2) PERIODIC
PAYMENTS.—For purposes of
paragraph (1), the term ‘periodic payment’ means
any payment (whether on a periodic basis or other-
wise) made without regard to the extent of the costs
incurred by the payee for qualified long-term care
services.
‘‘(3) DOLLAR AMOUNT.—The dollar amount in
effect under this subsection shall be $175 per day
(or the equivalent amount in the case of payments
on another periodic basis).
‘‘(4) INFLATION ADJUSTMENT.—In the case of
a calendar year after 1997, the dollar amount con-
tained in paragraph (3) shall be increased at the
same time and in the same manner as amounts are
increased pursuant to section 213(d)(10).
‘‘(e) TREATMENT OF COVERAGE PROVIDED AS PART
OF A LIFE INSURANCE CONTRACT.—Except as otherwise
provided in regulations prescribed by the Secretary, in the
case of any long-term care insurance coverage (whether
or not qualified) provided by a rider on or as part of a
life insurance contract—
298
‘‘(1) IN GENERAL.—This section shall apply as
if the portion of the contract providing such cov-
erage is a separate contract.
‘‘(2) 
APPLICATION
OF
7702.—Section
7702(c)(2) (relating to the guideline premium limi-
tation) shall be applied by increasing the guideline
premium limitation with respect to a life insurance
contract, as of any date—
‘‘(A) by the sum of any charges (but not
premium payments) against the life insurance
contract’s cash surrender value (within the
meaning of section 7702(f)(2)(A)) for such cov-
erage made to that date under the contract, less
‘‘(B) any such charges the imposition of
which reduces the premiums paid for the con-
tract 
(within 
the 
meaning 
of 
section
7702(f)(1)).
‘‘(3) APPLICATION OF SECTION 213.—No deduc-
tion shall be allowed under section 213(a) for
charges against the life insurance contract’s cash
surrender value described in paragraph (2), unless
such charges are includible in income as a result of
the application of section 72(e)(10) and the rider is
a qualified long-term care insurance contract under
subsection (b).
299
‘‘(4) PORTION DEFINED.—For purposes of this
subsection, the term ‘portion’ means only the terms
and benefits under a life insurance contract that are
in addition to the terms and benefits under the con-
tract without regard to the coverage under a quali-
fied long-term care insurance contract.’’
(b) LONG-TERM CARE INSURANCE NOT PERMITTED
UNDER CAFETERIA PLANS OR FLEXIBLE SPENDING AR-
RANGEMENTS.—
(1) CAFETERIA
PLANS.—Section 125(f) is
amended by adding at the end the following new
sentence: ‘‘Such term shall not include any long-
term care insurance contract (as defined in section
4980C).’’
(2) FLEXIBLE
SPENDING
ARRANGEMENTS.—
Section 106 (relating to contributions by employer to
accident and health plans), as amended by section
301(c), is amended by adding at the end the follow-
ing new subsection:
‘‘(c) INCLUSION OF LONG-TERM CARE BENEFITS
PROVIDED THROUGH FLEXIBLE SPENDING ARRANGE-
MENTS.—
‘‘(1) IN GENERAL.—Effective on and after Jan-
uary 1, 1997, gross income of an employee shall in-
clude employer-provided coverage for qualified long-
300
term care services (as defined in section 7702B(c))
to the extent that such coverage is provided through
a flexible spending or similar arrangement.
‘‘(2) FLEXIBLE
SPENDING
ARRANGEMENT.—
For purposes of this subsection, a flexible spending
arrangement is a benefit program which provides
employees with coverage under which—
‘‘(A) specified incurred expenses may be
reimbursed (subject to reimbursement maxi-
mums and other reasonable conditions), and
‘‘(B) the maximum amount of reimburse-
ment which is reasonably available to a partici-
pant for such coverage is less than 500 percent
of the value of such coverage.
In the case of an insured plan, the maximum
amount reasonably available shall be determined on
the basis of the underlying coverage.’’
(c) CONTINUATION COVERAGE EXCISE TAX NOT TO
APPLY.—Subsection (f) of section 4980B is amended by
adding at the end the following new paragraph:
‘‘(9) CONTINUATION OF LONG-TERM CARE COV-
ERAGE NOT REQUIRED.—A group health plan shall
not be treated as failing to meet the requirements of
this subsection solely by reason of failing to provide
301
coverage under any qualified long-term care insur-
ance contract (as defined in section 7702B(b)).’’
(d) CLERICAL AMENDMENT.—The table of sections
for chapter 79 is amended by inserting after the item re-
lating to section 7702A the following new item:
‘‘Sec. 7702B. Treatment of qualified long-term care insurance.’’.
(e) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to contracts issued after De-
cember 31, 1996.
(2) CONTINUATION OF EXISTING POLICIES.—In
the case of any contract issued before January 1,
1997, which met the long-term care insurance re-
quirements of the State in which the contract was
sitused at the time the contract was issued—
(A) such contract shall be treated for pur-
poses of the Internal Revenue Code of 1986 as
a qualified long-term care insurance contract
(as defined in section 7702B(b) of such Code),
and
(B) services provided under, or reimbursed
by, such contract shall be treated for such pur-
poses as qualified long-term care services (as
defined in section 7702B(c) of such Code).
(3) EXCHANGES
OF
EXISTING
POLICIES.—If,
after the date of enactment of this Act and before
302
January 1, 1998, a contract providing for long-term
care insurance coverage is exchanged solely for a
qualified long-term care insurance contract (as de-
fined in section 7702B(b) of such Code), no gain or
loss shall be recognized on the exchange. If, in addi-
tion to a qualified long-term care insurance contract,
money or other property is received in the exchange,
then any gain shall be recognized to the extent of
the sum of the money and the fair market value of
the other property received. For purposes of this
paragraph, the cancellation of a contract providing
for long-term care insurance coverage and reinvest-
ment of the cancellation proceeds in a qualified long-
term care insurance contract within 60 days there-
after shall be treated as an exchange.
(4) ISSUANCE
OF
CERTAIN
RIDERS
PER-
MITTED.—For purposes of applying sections 101(f),
7702, and 7702A of the Internal Revenue Code of
1986 to any contract—
(A) the issuance of a rider which is treated
as a qualified long-term care insurance contract
under section 7702B, and
(B) the addition of any provision required
to conform any other long-term care rider to be
so treated,
303
shall not be treated as a modification or material
change of such contract.
SEC. 322. QUALIFIED LONG-TERM CARE SERVICES TREAT-
ED AS MEDICAL CARE.
(a) GENERAL RULE.—Paragraph (1) of section
213(d) (defining medical care) is amended by striking
‘‘or’’ at the end of subparagraph (B), by redesignating
subparagraph (C) as subparagraph (D), and by inserting
after subparagraph (B) the following new subparagraph:
‘‘(C) for qualified long-term care services
(as defined in section 7702B(c)), or’’.
(b) TECHNICAL AMENDMENTS.—
(1) Subparagraph (D) of section 213(d)(1) (as
redesignated by subsection (a)) is amended by in-
serting before the period ‘‘or for any qualified long-
term care insurance contract (as defined in section
7702B(b))’’.
(2)(A) Paragraph (1) of section 213(d) is
amended by adding at the end the following new
flush sentence:
‘‘In the case of a qualified long-term care insurance
contract (as defined in section 7702B(b)), only eligi-
ble long-term care premiums (as defined in para-
graph (10)) shall be taken into account under sub-
paragraph (D).’’
304
(B) Subsection (d) of section 213 is amended
by adding at the end the following new paragraphs:
‘‘(10) 
ELIGIBLE
LONG-TERM
CARE
PRE-
MIUMS.—
‘‘(A) IN GENERAL.—For purposes of this
section, the term ‘eligible long-term care pre-
miums’ means the amount paid during a tax-
able year for any qualified long-term care insur-
ance contract (as defined in section 7702B(b))
covering an individual, to the extent such
amount does not exceed the limitation deter-
mined under the following table:
‘‘In the case of an individual
with an attained age before the
The limitation
close of the taxable year of:
is:
40 or less ...................................................
$
200
More than 40 but not more than 50 .........
375
More than 50 but not more than 60 .........
750
More than 60 but not more than 70 .........
2,000
More than 70 .............................................
2,500.
‘‘(B) INDEXING.—
‘‘(i) IN GENERAL.—In the case of any
taxable year beginning in a calendar year
after 1997, each dollar amount contained
in subparagraph (A) shall be increased by
the medical care cost adjustment of such
amount for such calendar year. If any in-
crease determined under the preceding sen-
tence is not a multiple of $10, such in-
305
crease shall be rounded to the nearest mul-
tiple of $10.
‘‘(ii) MEDICAL
CARE
COST
ADJUST-
MENT.—For purposes of clause (i), the
medical care cost adjustment for any cal-
endar year is the percentage (if any) by
which—
‘‘(I) the medical care component
of the Consumer Price Index (as de-
fined in section 1(f)(5)) for August of
the preceding calendar year, exceeds
‘‘(II) such component for August
of 1996.
The Secretary shall, in consultation with
the Secretary of Health and Human Serv-
ices, prescribe an adjustment which the
Secretary determines is more appropriate
for purposes of this paragraph than the
adjustment described in the preceding sen-
tence, and the adjustment so prescribed
shall apply in lieu of the adjustment de-
scribed in the preceding sentence.
‘‘(11) CERTAIN
PAYMENTS
TO
RELATIVES
TREATED AS NOT PAID FOR MEDICAL CARE.—An
amount paid for a qualified long-term care service
306
(as defined in section 7702B(c)) provided to an indi-
vidual shall be treated as not paid for medical care
if such service is provided—
‘‘(A) by the spouse of the individual or by
a relative (directly or through a partnership,
corporation, or other entity) unless the service
is provided by a licensed professional with re-
spect to such service, or
‘‘(B) by a corporation or partnership which
is related (within the meaning of section 267(b)
or 707(b)) to the individual.
For purposes of this paragraph, the term ‘relative’
means an individual bearing a relationship to the in-
dividual which is described in any of paragraphs (1)
through (8) of section 152(a). This paragraph shall
not apply for purposes of section 105(b) with respect
to reimbursements through insurance.’’
(3) Paragraph (6) of section 213(d) is
amended—
(A) by striking ‘‘subparagraphs (A) and
(B)’’ and inserting ‘‘subparagraphs (A), (B),
and (C)’’, and
(B) by striking ‘‘paragraph (1)(C)’’ in sub-
paragraph 
(A) 
and 
inserting 
‘‘paragraph
(1)(D)’’.
307
(4) Paragraph (7) of section 213(d) is amended
by striking ‘‘subparagraphs (A) and (B)’’ and insert-
ing ‘‘subparagraphs (A), (B), and (C)’’.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 1996.
(2) DEDUCTION FOR LONG-TERM CARE SERV-
ICES.—Amounts paid for qualified long-term care
services (as defined in section 7702B(c) of the Inter-
nal Revenue Code of 1986, as added by this Act)
furnished in any taxable year beginning before Janu-
ary 1, 1998, shall not be taken into account under
section 213 of the Internal Revenue Code of 1986.
SEC. 323. REPORTING REQUIREMENTS.
(a) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 61 is amended by adding at the end
the following new section:
‘‘SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS.
‘‘(a) REQUIREMENT
OF REPORTING.—Any person
who pays long-term care benefits shall make a return, ac-
cording to the forms or regulations prescribed by the Sec-
retary, setting forth—
309
‘‘(2) payments which are excludable from gross
income by reason of section 101(g).’’.
(b) PENALTIES.—
(1) Subparagraph (B) of section 6724(d)(1) is
amended by redesignating clauses (ix) through (xiv)
as clauses (x) through (xv), respectively, and by in-
serting after clause (viii) the following new clause:
‘‘(ix) section 6050Q (relating to cer-
tain long-term care benefits),’’.
(2) Paragraph (2) of section 6724(d) is amend-
ed by redesignating subparagraphs (Q) through (T)
as subparagraphs (R) through (U), respectively, and
by inserting after subparagraph (P) the following
new subparagraph:
‘‘(Q) section 6050Q(b) (relating to certain
long-term care benefits),’’.
(c) CLERICAL AMENDMENT.—The table of sections
for subpart B of part III of subchapter A of chapter 61
is amended by adding at the end the following new item:
‘‘Sec. 6050Q. Certain long-term care benefits.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to benefits paid after December
31, 1996.
310
PART II—CONSUMER PROTECTION PROVISIONS
SEC. 325. POLICY REQUIREMENTS.
Section 7702B (as added by section 321) is amended
by adding at the end the following new subsection:
‘‘(f) CONSUMER PROTECTION PROVISIONS.—
‘‘(1) IN GENERAL.—The requirements of this
subsection are met with respect to any contract if
any long-term care insurance policy issued under the
contract meets—
‘‘(A) the requirements of the model regula-
tion and model Act described in paragraph (2),
‘‘(B) the disclosure requirement of para-
graph (3), and
‘‘(C) 
the 
requirements 
relating 
to
nonforfeitability under paragraph (4).
‘‘(2) REQUIREMENTS OF MODEL REGULATION
AND ACT.—
‘‘(A) IN GENERAL.—The requirements of
this paragraph are met with respect to any pol-
icy if such policy meets—
‘‘(i) MODEL
REGULATION.—The fol-
lowing requirements of the model regula-
tion:
‘‘(I) Section 7A (relating to guar-
anteed renewal or noncancellability),
and the requirements of section 6B of
311
the model Act relating to such section
7A.
‘‘(II) Section 7B (relating to pro-
hibitions on limitations and exclu-
sions).
‘‘(III) Section 7C (relating to ex-
tension of benefits).
‘‘(IV) Section 7D (relating to
continuation or conversion of cov-
erage).
‘‘(V) Section 7E (relating to dis-
continuance and replacement of poli-
cies).
‘‘(VI) Section 8 (relating to unin-
tentional lapse).
‘‘(VII) Section 9 (relating to dis-
closure), other than section 9F there-
of.
‘‘(VIII) Section 10 (relating to
prohibitions against post-claims un-
derwriting).
‘‘(IX) Section 11 (relating to
minimum standards).
‘‘(X) Section 12 (relating to re-
quirement to offer inflation protec-
312
tion), except that any requirement for
a signature on a rejection of inflation
protection shall permit the signature
to be on an application or on a sepa-
rate form.
‘‘(XI) Section 23 (relating to pro-
hibition against preexisting conditions
and probationary periods in replace-
ment policies or certificates).
‘‘(ii) MODEL ACT.—The following re-
quirements of the model Act:
‘‘(I) Section 6C (relating to pre-
existing conditions).
‘‘(II) Section 6D (relating to
prior hospitalization).
‘‘(B) DEFINITIONS.—For purposes of this
paragraph—
‘‘(i) MODEL PROVISIONS.—The terms
‘model regulation’ and ‘model Act’ mean
the long-term care insurance model regula-
tion, and the long-term care insurance
model Act, respectively, promulgated by
the National Association of Insurance
Commissioners (as adopted as of January
1993).
313
‘‘(ii) COORDINATION.—Any provision
of the model regulation or model Act listed
under clause (i) or (ii) of subparagraph
(A) shall be treated as including any other
provision of such regulation or Act nec-
essary to implement the provision.
‘‘(iii) 
DETERMINATION.—For 
pur-
poses of this section and section 4980C,
the determination of whether any require-
ment of a model regulation or the model
Act has been met shall be made by the
Secretary.
‘‘(3) DISCLOSURE
REQUIREMENT.—The re-
quirement of this paragraph is met with respect to
any policy if such policy meets the requirements of
section 4980C(d)(1).
‘‘(4) NONFORFEITURE REQUIREMENTS.—
‘‘(A) IN GENERAL.—The requirements of
this paragraph are met with respect to any level
premium long-term care insurance policy, if the
issuer of such policy offers to the policyholder,
including 
any 
group 
policyholder, 
a
nonforfeiture provision meeting the require-
ments of subparagraph (B).
314
‘‘(B) REQUIREMENTS OF PROVISION.—The
nonforfeiture provision required under subpara-
graph (A) shall meet the following require-
ments:
‘‘(i) The nonforfeiture provision shall
be appropriately captioned.
‘‘(ii) The nonforfeiture provision shall
provide for a benefit available in the event
of a default in the payment of any pre-
miums and the amount of the benefit may
be adjusted subsequent to being initially
granted only as necessary to reflect
changes in claims, persistency, and interest
as reflected in changes in rates for pre-
mium paying policies approved by the Sec-
retary for the same policy form.
‘‘(iii) The nonforfeiture provision shall
provide at least one of the following:
‘‘(I) Reduced paid-up insurance.
‘‘(II) Extended term insurance.
‘‘(III) Shortened benefit period.
‘‘(IV) Other similar offerings ap-
proved by the Secretary.
‘‘(5) LONG-TERM CARE INSURANCE POLICY DE-
FINED.—For purposes of this subsection, the term
315
‘long-term care insurance policy’ has the meaning
given such term by section 4980C(e).’’.
SEC. 326. REQUIREMENTS FOR ISSUERS OF LONG-TERM
CARE INSURANCE POLICIES.
(a) IN GENERAL.—Chapter 43 is amended by adding
at the end the following new section:
‘‘SEC. 4980C. REQUIREMENTS FOR ISSUERS OF LONG-TERM
CARE INSURANCE POLICIES.
‘‘(a) GENERAL RULE.—There is hereby imposed on
any person failing to meet the requirements of subsection
(c) or (d) a tax in the amount determined under sub-
section (b).
‘‘(b) AMOUNT.—
‘‘(1) IN GENERAL.—The amount of the tax im-
posed by subsection (a) shall be $100 per policy for
each day any requirements of subsection (c) or (d)
are not met with respect to each long-term care in-
surance policy.
‘‘(2) WAIVER.—In the case of a failure which is
due to reasonable cause and not to willful neglect,
the Secretary may waive part or all of the tax im-
posed by subsection (a) to the extent that payment
of the tax would be excessive relative to the failure
involved.
316
‘‘(c) RESPONSIBILITIES.—The requirements of this
subsection are as follows:
‘‘(1) REQUIREMENTS OF MODEL PROVISIONS.—
‘‘(A) MODEL REGULATION.—The following
requirements of the model regulation must be
met:
‘‘(i) Section 13 (relating to application
forms and replacement coverage).
‘‘(ii) Section 14 (relating to reporting
requirements), except that the issuer shall
also report at least annually the number of
claims denied during the reporting period
for each class of business (expressed as a
percentage of claims denied), other than
claims denied for failure to meet the wait-
ing period or because of any applicable
preexisting condition.
‘‘(iii) Section 20 (relating to filing re-
quirements for marketing).
‘‘(iv) Section 21 (relating to standards
for marketing), including inaccurate com-
pletion of medical histories, other than sec-
tions 21C(1) and 21C(6) thereof, except
that—
317
‘‘(I) in addition to such require-
ments, no person shall, in selling or
offering to sell a long-term care insur-
ance policy, misrepresent a material
fact; and
‘‘(II) no such requirements shall
include a requirement to inquire or
identify whether a prospective appli-
cant or enrollee for long-term care in-
surance has accident and sickness in-
surance.
‘‘(v) Section 22 (relating to appro-
priateness of recommended purchase).
‘‘(vi) Section 24 (relating to standard
format outline of coverage).
‘‘(vii) Section 25 (relating to require-
ment to deliver shopper’s guide).
‘‘(B) MODEL ACT.—The following require-
ments of the model Act must be met:
‘‘(i) Section 6F (relating to right to
return), except that such section shall also
apply to denials of applications and any re-
fund shall be made within 30 days of the
return or denial.
318
‘‘(ii) Section 6G (relating to outline of
coverage).
‘‘(iii) Section 6H (relating to require-
ments for certificates under group plans).
‘‘(iv) Section 6I (relating to policy
summary).
‘‘(v) Section 6J (relating to monthly
reports on accelerated death benefits).
‘‘(vi) Section 7 (relating to incontest-
ability period).
‘‘(C) DEFINITIONS.—For purposes of this
paragraph, the terms ‘model regulation’ and
‘model Act’ have the meanings given such terms
by section 7702B(f)(2)(B).
‘‘(2) DELIVERY OF POLICY.—If an application
for a long-term care insurance policy (or for a cer-
tificate under a group long-term care insurance pol-
icy) is approved, the issuer shall deliver to the appli-
cant (or policyholder or certificateholder) the policy
(or certificate) of insurance not later than 30 days
after the date of the approval.
‘‘(3) INFORMATION ON DENIALS OF CLAIMS.—
If a claim under a long-term care insurance policy
is denied, the issuer shall, within 60 days of the date
319
of a written request by the policyholder or
certificateholder (or representative)—
‘‘(A) provide a written explanation of the
reasons for the denial, and
‘‘(B) make available all information di-
rectly relating to such denial.
‘‘(d) DISCLOSURE.—The requirements of this sub-
section are met if the issuer of a long-term care insurance
policy discloses in such policy and in the outline of cov-
erage required under subsection (c)(1)(B)(ii) that the pol-
icy is intended to be a qualified long-term care insurance
contract under section 7702B(b).
‘‘(e) LONG-TERM CARE INSURANCE POLICY DE-
FINED.—For purposes of this section, the term ‘long-term
care insurance policy’ means any product which is adver-
tised, marketed, or offered as long-term care insurance.’’.
(b) CONFORMING AMENDMENT.—The table of sec-
tions for chapter 43 is amended by adding at the end the
following new item:
‘‘Sec. 4980C. Requirements for issuers of long-term care insur-
ance policies.’’.
SEC. 327. COORDINATION WITH STATE REQUIREMENTS.
Nothing in this part shall prevent a State from estab-
lishing, implementing, or continuing in effect standards
related to the protection of policyholders of long-term care
insurance policies (as defined in section 4980C(e) of the
320
Internal Revenue Code of 1986), if such standards are not
in conflict with or inconsistent with the standards estab-
lished under such Code.
SEC. 328. EFFECTIVE DATES.
(a) IN GENERAL.—The provisions of, and amend-
ments made by, this part shall apply to contracts issued
after December 31, 1996. The provisions of section 321(g)
(relating to transition rule) shall apply to such contracts.
(b) ISSUERS.—The amendments made by section 326
shall apply to actions taken after December 31, 1996.
Subtitle D—Treatment of
Accelerated Death Benefits
SEC. 331. TREATMENT OF ACCELERATED DEATH BENEFITS
BY RECIPIENT.
(a) IN GENERAL.—Section 101 (relating to certain
death benefits) is amended by adding at the end the fol-
lowing new subsection:
‘‘(g) TREATMENT
OF
CERTAIN
ACCELERATED
DEATH BENEFITS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the following amounts shall be treated as an
amount paid by reason of the death of an insured:
‘‘(A) Any amount received under a life in-
surance contract on the life of an insured who
is a terminally ill individual.
321
‘‘(B) Any amount received under a life in-
surance contract on the life of an insured who
is a chronically ill individual (as defined in sec-
tion 7702B(c)(2)) but only if such amount is
received under a rider or other provision of
such contract which is treated as a qualified
long-term care insurance contract under section
7702B and such amount is treated under sec-
tion 7702B (after the application of subsection
(d) thereof) as a payment for qualified long-
term care services (as defined in such section).
‘‘(2) 
TREATMENT
OF
VIATICAL
SETTLE-
MENTS.—
‘‘(A) IN GENERAL.—In the case of a life
insurance contract on the life of an insured de-
scribed in paragraph (1), if—
‘‘(i) any portion of such contract is
sold to any viatical settlement provider, or
‘‘(ii) any portion of the death benefit
is assigned to such a provider,
the amount paid for such sale or assignment
shall be treated as an amount paid under the
life insurance contract by reason of the death of
such insured.
322
‘‘(B) VIATICAL SETTLEMENT PROVIDER.—
The term ‘viatical settlement provider’ means
any person regularly engaged in the trade or
business of purchasing, or taking assignments
of, life insurance contracts on the lives of
insureds described in paragraph (1) if—
‘‘(i) such person is licensed for such
purposes in the State in which the insured
resides, or
‘‘(ii) in the case of an insured who re-
sides in a State not requiring the licensing
of such persons for such purposes—
‘‘(I) such person meets the re-
quirements of sections 8 and 9 of the
Viatical Settlements Model Act of the
National Association of Insurance
Commissioners, and
‘‘(II) meets the requirements of
the Model Regulations of the National
Association of Insurance Commis-
sioners (relating to standards for eval-
uation of reasonable payments) in de-
termining amounts paid by such per-
son in connection with such purchases
or assignments.
323
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) TERMINALLY ILL INDIVIDUAL.—The
term ‘terminally ill individual’ means an indi-
vidual who has been certified by a physician as
having an illness or physical condition which
can reasonably be expected to result in death in
24 months or less after the date of the certifi-
cation.
‘‘(B) PHYSICIAN.—The term ‘physician’
has the meaning given to such term by section
1861(r)(1) of the Social Security Act (42
U.S.C. 1395x(r)(1)).
‘‘(4) EXCEPTION FOR BUSINESS-RELATED POLI-
CIES.—This subsection shall not apply in the case of
any amount paid to any taxpayer other than the in-
sured if such taxpayer has an insurable interest with
respect to the life of the insured by reason of the in-
sured being a director, officer, or employee of the
taxpayer or by reason of the insured being finan-
cially interested in any trade or business carried on
by the taxpayer.’’
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to amounts received after De-
cember 31, 1996.
324
SEC. 332. TAX TREATMENT OF COMPANIES ISSUING QUALI-
FIED ACCELERATED DEATH BENEFIT RID-
ERS.
(a) QUALIFIED ACCELERATED DEATH BENEFIT RID-
ERS TREATED AS LIFE INSURANCE.—Section 818 (relat-
ing to other definitions and special rules) is amended by
adding at the end the following new subsection:
‘‘(g) QUALIFIED ACCELERATED DEATH BENEFIT
RIDERS TREATED AS LIFE INSURANCE.—For purposes of
this part—
‘‘(1) IN GENERAL.—Any reference to a life in-
surance contract shall be treated as including a ref-
erence to a qualified accelerated death benefit rider
on such contract.
‘‘(2) QUALIFIED ACCELERATED DEATH BENE-
FIT RIDERS.—For purposes of this subsection, the
term ‘qualified accelerated death benefit rider’
means any rider on a life insurance contract if the
only payments under the rider are payments meeting
the requirements of section 101(g).
‘‘(3) EXCEPTION FOR LONG-TERM CARE RID-
ERS.—Paragraph (1) shall not apply to any rider
which is treated as a long-term care insurance con-
tract under section 7702B.’’
(b) EFFECTIVE DATE.—
325
(1) IN
GENERAL.—The amendment made by
this section shall take effect on January 1, 1997.
(2) ISSUANCE OF RIDER NOT TREATED AS MA-
TERIAL CHANGE.—For purposes of applying sections
101(f), 7702, and 7702A of the Internal Revenue
Code of 1986 to any contract—
(A) the issuance of a qualified accelerated
death benefit rider (as defined in section 818(g)
of such Code (as added by this Act)), and
(B) the addition of any provision required
to conform an accelerated death benefit rider to
the requirements of such section 818(g),
shall not be treated as a modification or material
change of such contract.
Subtitle E—High-Risk Pools
SEC. 341. EXEMPTION FROM INCOME TAX FOR STATE-SPON-
SORED ORGANIZATIONS PROVIDING HEALTH
COVERAGE FOR HIGH-RISK INDIVIDUALS.
(a) IN GENERAL.—Subsection (c) of section 501 (re-
lating to list of exempt organizations) is amended by add-
ing at the end the following new paragraph:
‘‘(26) Any membership organization if—
‘‘(A) such organization is established by a
State exclusively to provide coverage for medical
care (as defined in section 213(d)) on a not-for-
326
profit basis to individuals described in subpara-
graph (B) through—
‘‘(i) insurance issued by the organiza-
tion, or
‘‘(ii) a health maintenance organiza-
tion under an arrangement with the orga-
nization,
‘‘(B) the only individuals receiving such
coverage through the organization are individ-
uals—
‘‘(i) who are residents of such State,
and
‘‘(ii) who, by reason of the existence
or history of a medical condition, are un-
able to acquire medical care coverage for
such condition through insurance or from
a health maintenance organization or are
able to acquire such coverage only at a
rate which is substantially in excess of the
rate for such coverage through the mem-
bership organization,
‘‘(C) the composition of the membership in
such organization is specified by such State,
and
327
‘‘(D) no part of the net earnings of the or-
ganization inures to the benefit of any private
shareholder or individual.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1996.
Subtitle F—Organizations Subject
to Section 833
SEC. 351. ORGANIZATIONS SUBJECT TO SECTION 833.
(a) IN GENERAL.—Section 833(c) (relating to orga-
nization to which section applies) is amended by adding
at the end the following new paragraph:
‘‘(4) TREATMENT AS EXISTING BLUE CROSS OR
BLUE SHIELD ORGANIZATION.—
‘‘(A) IN
GENERAL.—Paragraph (2) shall
be applied to an organization described in sub-
paragraph (B) as if it were a Blue Cross or
Blue Shield organization.
‘‘(B) APPLICABLE ORGANIZATION.—An or-
ganization is described in this subparagraph if
it—
‘‘(i) is organized under, and governed
by, State laws which are specifically and
exclusively 
applicable 
to 
not-for-profit
328
health insurance or health service type or-
ganizations, and
‘‘(ii) is not a Blue Cross or Blue
Shield organization or health maintenance
organization.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years ending after De-
cember 31, 1996.
TITLE IV—REVENUE OFFSETS
SEC. 400. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in
this title an amendment or repeal is expressed in terms
of an amendment to, or repeal of, a section or other provi-
sion, the reference shall be considered to be made to a
section or other provision of the Internal Revenue Code
of 1986.
Subtitle A—Repeal of Bad Debt Re-
serve Method for Thrift Savings
Associations
SEC. 401. REPEAL OF BAD DEBT RESERVE METHOD FOR
THRIFT SAVINGS ASSOCIATIONS.
(a) IN GENERAL.—Section 593 (relating to reserves
for losses on loans) is amended by adding at the end the
following new subsections:
329
‘‘(f) TERMINATION
OF RESERVE METHOD.—Sub-
sections (a), (b), (c), and (d) shall not apply to any taxable
year beginning after December 31, 1995.
‘‘(g) 6-YEAR SPREAD OF ADJUSTMENTS.—
‘‘(1) IN GENERAL.—In the case of any taxpayer
who is required by reason of subsection (f) to change
its method of computing reserves for bad debts—
‘‘(A) such change shall be treated as a
change in a method of accounting,
‘‘(B) such change shall be treated as initi-
ated by the taxpayer and as having been made
with the consent of the Secretary, and
‘‘(C) the net amount of the adjustments
required to be taken into account by the tax-
payer under section 481(a)—
‘‘(i) shall be determined by taking into
account only applicable excess reserves,
and
‘‘(ii) as so determined, shall be taken
into account ratably over the 6-taxable
year period beginning with the first taxable
year beginning after December 31, 1995.
‘‘(2) APPLICABLE EXCESS RESERVES.—
330
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), the term ‘applicable excess reserves’
means the excess (if any) of—
‘‘(i) the balance of the reserves de-
scribed in subsection (c)(1) (other than the
supplemental reserve) as of the close of the
taxpayer’s last taxable year beginning be-
fore December 31, 1995, over
‘‘(ii) the lesser of—
‘‘(I) the balance of such reserves
as of the close of the taxpayer’s last
taxable year beginning before January
1, 1988, or
‘‘(II) the balance of the reserves
described in subclause (I), reduced in
the same manner as under section
585(b)(2)(B)(ii) on the basis of the
taxable years described in clause (i)
and this clause.
‘‘(B) SPECIAL RULE FOR THRIFTS WHICH
BECOME SMALL BANKS.—In the case of a bank
(as defined in section 581) which was not a
large bank (as defined in section 585(c)(2)) for
its first taxable year beginning after December
31, 1995—
331
‘‘(i) the balance taken into account
under subparagraph (A)(ii) shall not be
less than the amount which would be the
balance of such reserves as of the close of
its last taxable year beginning before such
date if the additions to such reserves for
all taxable years had been determined
under section 585(b)(2)(A), and
‘‘(ii) the opening balance of the re-
serve for bad debts as of the beginning of
such first taxable year shall be the balance
taken into account under subparagraph
(A)(ii) (determined after the application of
clause (i) of this subparagraph).
The preceding sentence shall not apply for pur-
poses of paragraphs (5) and (6) or subsection
(e)(1).
‘‘(3) 
RECAPTURE
OF
PRE-1988
RESERVES
WHERE TAXPAYER CEASES TO BE BANK.—If, during
any taxable year beginning after December 31,
1995, a taxpayer to which paragraph (1) applied is
not a bank (as defined in section 581), paragraph
(1) shall apply to the reserves described in para-
graph (2)(A)(ii) and the supplemental reserve; ex-
cept that such reserves shall be taken into account
332
ratably over the 6-taxable year period beginning with
such taxable year.
‘‘(4) SUSPENSION OF RECAPTURE IF RESIDEN-
TIAL LOAN REQUIREMENT MET.—
‘‘(A) IN GENERAL.—In the case of a bank
which meets the residential loan requirement of
subparagraph (B) for the first taxable year be-
ginning after December 31, 1995, or for the
following taxable year—
‘‘(i) no adjustment shall be taken into
account under paragraph (1) for such tax-
able year, and
‘‘(ii) such taxable year shall be dis-
regarded in determining—
‘‘(I) whether any other taxable
year is a taxable year for which an
adjustment is required to be taken
into account under paragraph (1), and
‘‘(II) the amount of such adjust-
ment.
‘‘(B) 
RESIDENTIAL
LOAN
REQUIRE-
MENT.—A taxpayer meets the residential loan
requirement of this subparagraph for any tax-
able year if the principal amount of the residen-
tial loans made by the taxpayer during such
333
year is not less than the base amount for such
year.
‘‘(C) RESIDENTIAL
LOAN.—For purposes
of this paragraph, the term ‘residential loan’
means any loan described in clause (v) of sec-
tion 7701(a)(19)(C) but only if such loan is in-
curred in acquiring, constructing, or improving
the property described in such clause.
‘‘(D) BASE
AMOUNT.—For purposes of
subparagraph (B), the base amount is the aver-
age of the principal amounts of the residential
loans made by the taxpayer during the 6 most
recent taxable years beginning on or before De-
cember 31, 1995. At the election of the tax-
payer who made such loans during each of such
6 taxable years, the preceding sentence shall be
applied without regard to the taxable year in
which such principal amount was the highest
and the taxable year in such principal amount
was the lowest. Such an election may be made
only for the first taxable year beginning after
such date, and, if made for such taxable year,
shall apply to the succeeding taxable year un-
less revoked with the consent of the Secretary.
334
‘‘(E) CONTROLLED GROUPS.—In the case
of a taxpayer which is a member of any con-
trolled group of corporations described in sec-
tion 1563(a)(1), subparagraph (B) shall be ap-
plied with respect to such group.
‘‘(5) CONTINUED
APPLICATION
OF
FRESH
START UNDER SECTION 585 TRANSITIONAL RULES.—
In the case of a taxpayer to which paragraph (1) ap-
plied and which was not a large bank (as defined in
section 585(c)(2)) for its first taxable year beginning
after December 31, 1995:
‘‘(A) IN GENERAL.—For purposes of deter-
mining the net amount of adjustments referred
to in section 585(c)(3)(A)(iii), there shall be
taken into account only the excess (if any) of
the reserve for bad debts as of the close of the
last taxable year before the disqualification year
over the balance taken into account by such
taxpayer under paragraph (2)(A)(ii) of this sub-
section.
‘‘(B) TREATMENT UNDER ELECTIVE CUT-
OFF METHOD.—For purposes of applying sec-
tion 585(c)(4)—
‘‘(i) the balance of the reserve taken
into account under subparagraph (B)
335
thereof shall be reduced by the balance
taken into account by such taxpayer under
paragraph (2)(A)(ii) of this subsection,
and
‘‘(ii) no amount shall be includible in
gross income by reason of such reduction.
‘‘(6) SUSPENDED RESERVE INCLUDED AS SEC-
TION 381(c) ITEMS.—The balance taken into account
by a taxpayer under paragraph (2)(A)(ii) of this
subsection and the supplemental reserve shall be
treated as items described in section 381(c).
‘‘(7) CONVERSIONS TO CREDIT UNIONS.—In the
case of a taxpayer to which paragraph (1) applied
which becomes a credit union described in section
501(c) and exempt from taxation under section
501(a)—
‘‘(A) any amount required to be included
in the gross income of the credit union by rea-
son of this subsection shall be treated as de-
rived from an unrelated trade or business (as
defined in section 513), and
‘‘(B) for purposes of paragraph (3), the
credit union shall not be treated as if it were
a bank.
336
‘‘(8) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary to carry
out this subsection and subsection (e), including reg-
ulations providing for the application of such sub-
sections in the case of acquisitions, mergers, spin-
offs, and other reorganizations.’’
(b) CONFORMING AMENDMENTS.—
(1) Subsection (d) of section 50 is amended by
adding at the end the following new sentence:
‘‘Paragraphs (1)(A), (2)(A), and (4) of the section 46(e)
referred to in paragraph (1) of this subsection shall not
apply to any taxable year beginning after December 31,
1995.’’
(2) Subsection (e) of section 52 is amended by
striking paragraph (1) and by redesignating para-
graphs (2) and (3) as paragraphs (1) and (2), re-
spectively.
(3) Subsection (a) of section 57 is amended by
striking paragraph (4).
(4) Section 246 is amended by striking sub-
section (f).
(5) Clause (i) of section 291(e)(1)(B) is amend-
ed by striking ‘‘or to which section 593 applies’’.
337
(6) Subparagraph (A) of section 585(a)(2) is
amended by striking ‘‘other than an organization to
which section 593 applies’’.
(7)(A) The material preceding subparagraph
(A) of section 593(e)(1) is amended by striking ‘‘by
a domestic building and loan association or an insti-
tution that is treated as a mutual savings bank
under section 591(b)’’ and inserting ‘‘by a taxpayer
having 
a 
balance 
described 
in 
subsection
(g)(2)(A)(ii)’’.
(B) Subparagraph (B) of section 593(e)(1) is
amended to read as follows:
‘‘(B) then out of the balance taken into ac-
count under subsection (g)(2)(A)(ii) (properly
adjusted for amounts charged against such re-
serves for taxable years beginning after Decem-
ber 31, 1987),’’.
(C) Paragraph (1) of section 593(e) is amended
by adding at the end the following new sentence:
‘‘This paragraph shall not apply to any distribution
of all of the stock of a bank (as defined in section
581) to another corporation if, immediately after the
distribution, such bank and such other corporation
are members of the same affiliated group (as defined
in section 1504) and the provisions of section 5(e)
338
of the Federal Deposit Insurance Act (as in effect
on December 31, 1995) or similar provisions are in
effect.’’
(8) Section 595 is hereby repealed.
(9) Section 596 is hereby repealed.
(10) Subsection (a) of section 860E is amend-
ed—
(A) by striking ‘‘Except as provided in
paragraph (2), the’’ in paragraph (1) and in-
serting ‘‘The’’,
(B) by striking paragraphs (2) and (4) and
redesignating paragraphs (3) and (5) as para-
graphs (2) and (3), respectively, and
(C) by striking in paragraph (2) (as so re-
designated) all that follows ‘‘subsection’’ and
inserting a period.
(11) Paragraph (3) of section 992(d) is amend-
ed by striking ‘‘or 593’’.
(12) Section 1038 is amended by striking sub-
section (f).
(13) Clause (ii) of section 1042(c)(4)(B) is
amended by striking ‘‘or 593’’.
(14) Subsection (c) of section 1277 is amended
by striking ‘‘or to which section 593 applies’’.
339
(15) Subparagraph (B) of section 1361(b)(2) is
amended by striking ‘‘or to which section 593 ap-
plies’’.
(16) The table of sections for part II of sub-
chapter H of chapter 1 is amended by striking the
items relating to sections 595 and 596.
(c) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to taxable years beginning
after December 31, 1995.
(2) SUBSECTION
(b)(7).—The amendments
made by subsection (b)(7) shall not apply to any dis-
tribution with respect to preferred stock if—
(A) such stock is outstanding at all times
after October 31, 1995, and before the distribu-
tion, and
(B) such distribution is made before the
date which is 1 year after the date of the enact-
ment of this Act (or, in the case of stock which
may be redeemed, if later, the date which is 30
days after the earliest date that such stock may
be redeemed).
(3) 
SUBSECTION
(b)(8).—The 
amendment
made by subsection (b)(8) shall apply to property
340
acquired in taxable years beginning after December
31, 1995.
(4) SUBSECTION
(b)(10).—The amendments
made by subsection (b)(10) shall not apply to any
residual interest held by a taxpayer if such interest
has been held by such taxpayer at all times after Oc-
tober 31, 1995.
Subtitle B—Reform of the Earned
Income Credit
SEC. 411. EARNED INCOME CREDIT DENIED TO INDIVID-
UALS NOT AUTHORIZED TO BE EMPLOYED IN
THE UNITED STATES.
(a) IN GENERAL.—Section 32(c)(1) (relating to indi-
viduals eligible to claim the earned income credit) is
amended by adding at the end the following new subpara-
graph:
‘‘(F) IDENTIFICATION NUMBER REQUIRE-
MENT.—The term ‘eligible individual’ does not
include any individual who does not include on
the return of tax for the taxable year—
‘‘(i) such individual’s taxpayer identi-
fication number, and
‘‘(ii) if the individual is married (with-
in the meaning of section 7703), the tax-
341
payer identification number of such indi-
vidual’s spouse.’’.
(b) SPECIAL IDENTIFICATION NUMBER.—Section 32
is amended by adding at the end the following new sub-
section:
‘‘(l) IDENTIFICATION NUMBERS.—Solely for pur-
poses of subsections (c)(1)(F) and (c)(3)(D), a taxpayer
identification number means a social security number is-
sued to an individual by the Social Security Administra-
tion (other than a social security number issued pursuant
to clause (II) (or that portion of clause (III) that relates
to clause (II)) of section 205(c)(2)(B)(i) of the Social Se-
curity Act).’’.
(c) EXTENSION OF PROCEDURES APPLICABLE TO
MATHEMATICAL
OR
CLERICAL
ERRORS.—Section
6213(g)(2) (relating to the definition of mathematical or
clerical errors) is amended by striking ‘‘and’’ at the end
of subparagraph (D), by striking the period at the end
of subparagraph (E) and inserting a comma, and by in-
serting after subparagraph (E) the following new subpara-
graphs:
‘‘(F) an omission of a correct taxpayer
identification number required under section 32
(relating to the earned income credit) to be in-
cluded on a return, and
342
‘‘(G) an entry on a return claiming the
credit under section 32 with respect to net
earnings from self-employment described in sec-
tion 32(c)(2)(A) to the extent the tax imposed
by section 1401 (relating to self-employment
tax) on such net earnings has not been paid.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
Subtitle C—Treatment of Individ-
uals Who Lose United States
Citizenship
SEC. 421. REVISION OF INCOME, ESTATE, AND GIFT TAXES
ON INDIVIDUALS WHO LOSE UNITED STATES
CITIZENSHIP.
(a) IN GENERAL.—Subsection (a) of section 877 is
amended to read as follows:
‘‘(a) TREATMENT OF EXPATRIATES.—
‘‘(1) IN GENERAL.—Every nonresident alien in-
dividual who, within the 10-year period immediately
preceding the close of the taxable year, lost United
States citizenship, unless such loss did not have for
1 of its principal purposes the avoidance of taxes
under this subtitle or subtitle B, shall be taxable for
such taxable year in the manner provided in sub-
343
section (b) if the tax imposed pursuant to such sub-
section exceeds the tax which, without regard to this
section, is imposed pursuant to section 871.
‘‘(2) CERTAIN INDIVIDUALS TREATED AS HAV-
ING
TAX
AVOIDANCE
PURPOSE.—For purposes of
paragraph (1), an individual shall be treated as hav-
ing a principal purpose to avoid such taxes if—
‘‘(A) the average annual net income tax
(as defined in section 38(c)(1)) of such individ-
ual for the period of 5 taxable years ending be-
fore the date of the loss of United States citi-
zenship is greater than $100,000, or
‘‘(B) the net worth of the individual as of
such date is $500,000 or more.
In the case of the loss of United States citizenship
in any calendar year after 1996, such $100,000 and
$500,000 amounts shall be increased by an amount
equal to such dollar amount multiplied by the cost-
of-living 
adjustment 
determined 
under 
section
1(f)(3) for such calendar year by substituting ‘1994’
for ‘1992’ in subparagraph (B) thereof. Any in-
crease under the preceding sentence shall be round-
ed to the nearest multiple of $1,000.’’
(b) EXCEPTIONS.—
344
(1) IN GENERAL.—Section 877 is amended by
striking subsection (d), by redesignating subsection
(c) as subsection (d), and by inserting after sub-
section (b) the following new subsection:
‘‘(c) TAX AVOIDANCE NOT PRESUMED IN CERTAIN
CASES.—
‘‘(1) IN GENERAL.—Subsection (a)(2) shall not
apply to an individual if—
‘‘(A) such individual is described in a sub-
paragraph of paragraph (2) of this subsection,
and
‘‘(B) within the 1-year period beginning on
the date of the loss of United States citizenship,
such individual submits a ruling request for the
Secretary’s determination as to whether such
loss has for 1 of its principal purposes the
avoidance of taxes under this subtitle or subtitle
B.
‘‘(2) INDIVIDUALS DESCRIBED.—
‘‘(A) DUAL CITIZENSHIP, ETC.—An indi-
vidual is described in this subparagraph if—
‘‘(i) the individual became at birth a
citizen of the United States and a citizen
of another country and continues to be a
citizen of such other country, or
345
‘‘(ii) the individual becomes (not later
than the close of a reasonable period after
loss of United States citizenship) a citizen
of the country in which—
‘‘(I) such individual was born,
‘‘(II) if such individual is mar-
ried, such individual’s spouse was
born, or
‘‘(III) either of such individual’s
parents were born.
‘‘(B) LONG-TERM FOREIGN RESIDENTS.—
An individual is described in this subparagraph
if, for each year in the 10-year period ending on
the date of loss of United States citizenship, the
individual was present in the United States for
days 
or 
less. 
The 
rule 
of 
section
7701(b)(3)(D)(ii) shall apply for purposes of
this subparagraph.
‘‘(C) RENUNCIATION UPON REACHING AGE
OF
MAJORITY.—An individual is described in
this subparagraph if the individual’s loss of
United States citizenship occurs before such in-
dividual attains age 181⁄2.
‘‘(D) INDIVIDUALS SPECIFIED IN REGULA-
TIONS.—An individual is described in this sub-
346
paragraph if the individual is described in a
category of individuals prescribed by regulation
by the Secretary.’’
(2) TECHNICAL AMENDMENT.—Paragraph (1)
of section 877(b) of such Code is amended by strik-
ing ‘‘subsection (c)’’ and inserting ‘‘subsection (d)’’.
(c) TREATMENT
OF PROPERTY DISPOSED
OF
IN
NONRECOGNITION TRANSACTIONS; TREATMENT OF DIS-
TRIBUTIONS
FROM
CERTAIN
CONTROLLED
FOREIGN
CORPORATIONS.—Subsection (d) of section 877, as redes-
ignated by subsection (b), is amended to read as follows:
‘‘(d) SPECIAL RULES FOR SOURCE, ETC.—For pur-
poses of subsection (b)—
‘‘(1) SOURCE RULES.—The following items of
gross income shall be treated as income from sources
within the United States:
‘‘(A) SALE OF PROPERTY.—Gains on the
sale or exchange of property (other than stock
or debt obligations) located in the United
States.
‘‘(B) STOCK
OR
DEBT
OBLIGATIONS.—
Gains on the sale or exchange of stock issued
by a domestic corporation or debt obligations of
United States persons or of the United States,
347
a State or political subdivision thereof, or the
District of Columbia.
‘‘(C) INCOME
OR
GAIN
DERIVED
FROM
CONTROLLED FOREIGN CORPORATION.—Any in-
come or gain derived from stock in a foreign
corporation but only—
‘‘(i) if the individual losing United
States citizenship owned (within the mean-
ing of section 958(a)), or is considered as
owning (by applying the ownership rules of
section 958(b)), at any time during the 2-
year period ending on the date of the loss
of United States citizenship, more than 50
percent of—
‘‘(I) the total combined voting
power of all classes of stock entitled
to vote of such corporation, or
‘‘(II) the total value of the stock
of such corporation, and
‘‘(ii) to the extent such income or gain
does not exceed the earnings and profits
attributable to such stock which were
earned or accumulated before the loss of
citizenship and during periods that the
348
ownership requirements of clause (i) are
met.
‘‘(2) GAIN
RECOGNITION
ON
CERTAIN
EX-
CHANGES.—
‘‘(A) IN GENERAL.—In the case of any ex-
change of property to which this paragraph ap-
plies, notwithstanding any other provision of
this title, such property shall be treated as sold
for its fair market value on the date of such ex-
change, and any gain shall be recognized for
the taxable year which includes such date.
‘‘(B) EXCHANGES TO WHICH PARAGRAPH
APPLIES.—This paragraph shall apply to any
exchange during the 10-year period described in
subsection (a) if—
‘‘(i) gain would not (but for this para-
graph) be recognized on such exchange in
whole or in part for purposes of this sub-
title,
‘‘(ii) income derived from such prop-
erty was from sources within the United
States (or, if no income was so derived,
would have been from such sources), and
349
‘‘(iii) income derived from the prop-
erty acquired in the exchange would be
from sources outside the United States.
‘‘(C) 
EXCEPTION.—Subparagraph 
(A)
shall not apply if the individual enters into an
agreement with the Secretary which specifies
that any income or gain derived from the prop-
erty acquired in the exchange (or any other
property which has a basis determined in whole
or part by reference to such property) during
such 10-year period shall be treated as from
sources within the United States. If the prop-
erty transferred in the exchange is disposed of
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.
350
‘‘(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,
shall be treated as an exchange to which this
paragraph applies.
‘‘(3) SUBSTANTIAL DIMINISHING OF RISKS OF
OWNERSHIP.—For purposes of determining whether
this section applies to any gain on the sale or ex-
change of any property, the running of the 10-year
period described in subsection (a) shall be suspended
for any period during which the individual’s risk of
loss with respect to the property is substantially di-
minished by—
‘‘(A) the holding of a put with respect to
such property (or similar property),
351
‘‘(B) the holding by another person of a
right to acquire the property, or
‘‘(C) a short sale or any other trans-
action.’’
(d) CREDIT
FOR FOREIGN TAXES IMPOSED
ON
UNITED STATES SOURCE INCOME.—
(1) Subsection (b) of section 877 is amended by
adding at the end the following new sentence: ‘‘The
tax imposed solely by reason of this section shall be
reduced (but not below zero) by the amount of any
income, war profits, and excess profits taxes (within
the meaning of section 903) paid to any foreign
country or possession of the United States on any
income of the taxpayer on which tax is imposed sole-
ly by reason of this section.’’
(2) Subsection (a) of section 877, as amended
by subsection (a), is amended by inserting ‘‘(after
any reduction in such tax under the last sentence of
such subsection)’’ after ‘‘such subsection’’.
(e) COMPARABLE ESTATE AND GIFT TAX TREAT-
MENT.—
(1) ESTATE TAX.—
(A) IN GENERAL.—Subsection (a) of sec-
tion 2107 is amended to read as follows:
‘‘(a) TREATMENT OF EXPATRIATES.—
352
‘‘(1) RATE OF TAX.—A tax computed in accord-
ance with the table contained in section 2001 is
hereby imposed on the transfer of the taxable estate,
determined as provided in section 2106, of every de-
cedent nonresident not a citizen of the United States
if, within the 10-year period ending with the date
of death, such decedent lost United States citizen-
ship, unless such loss did not have for 1 of its prin-
cipal purposes the avoidance of taxes under this sub-
title or subtitle A.
‘‘(2) CERTAIN INDIVIDUALS TREATED AS HAV-
ING TAX AVOIDANCE PURPOSE.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), an individual shall be treated as hav-
ing a principal purpose to avoid such taxes if
such individual is so treated under section
877(a)(2).
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply to a decedent meeting the re-
quirements of section 877(c)(1).’’
(B) 
CREDIT
FOR
FOREIGN
DEATH
TAXES.—Subsection (c) of section 2107 is
amended by redesignating paragraph (2) as
paragraph (3) and by inserting after paragraph
(1) the following new paragraph:
353
‘‘(2) CREDIT FOR FOREIGN DEATH TAXES.—
‘‘(A) IN GENERAL.—The tax imposed by
subsection (a) shall be credited with the amount
of any estate, inheritance, legacy, or succession
taxes actually paid to any foreign country in re-
spect of any property which is included in the
gross estate solely by reason of subsection (b).
‘‘(B) LIMITATION ON CREDIT.—The credit
allowed by subparagraph (A) for such taxes
paid to a foreign country shall not exceed the
lesser of—
‘‘(i) the amount which bears the same
ratio to the amount of such taxes actually
paid to such foreign country in respect of
property included in the gross estate as the
value of the property included in the gross
estate solely by reason of subsection (b)
bears to the value of all property subjected
to such taxes by such foreign country, or
‘‘(ii) such property’s proportionate
share of the excess of—
‘‘(I) the tax imposed by sub-
section (a), over
354
‘‘(II) the tax which would be im-
posed by section 2101 but for this
section.
‘‘(C) PROPORTIONATE
SHARE.—For pur-
poses of subparagraph (B), a property’s propor-
tionate share is the percentage of the value of
the property which is included in the gross es-
tate solely by reason of subsection (b) bears to
the total value of the gross estate.’’
(C) EXPANSION OF INCLUSION IN GROSS
ESTATE
OF
STOCK
OF
FOREIGN
CORPORA-
TIONS.—Paragraph (2) of section 2107(b) is
amended by striking ‘‘more than 50 percent of’’
and all that follows and inserting ‘‘more than
50 percent of—
‘‘(A) the total combined voting power of all
classes of stock entitled to vote of such corpora-
tion, or
‘‘(B) the total value of the stock of such
corporation,’’.
(2) GIFT TAX.—
(A) IN GENERAL.—Paragraph (3) of sec-
tion 2501(a) is amended to read as follows:
‘‘(3) EXCEPTION.—
355
‘‘(A) CERTAIN
INDIVIDUALS.—Paragraph
(2) shall not apply in the case of a donor who,
within the 10-year period ending with the date
of transfer, lost United States citizenship, un-
less such loss did not have for 1 of its principal
purposes the avoidance of taxes under this sub-
title or subtitle A.
‘‘(B) CERTAIN INDIVIDUALS TREATED AS
HAVING TAX AVOIDANCE PURPOSE.—For pur-
poses of subparagraph (A), an individual shall
be treated as having a principal purpose to
avoid such taxes if such individual is so treated
under section 877(a)(2).
‘‘(C) EXCEPTION
FOR
CERTAIN
INDIVID-
UALS.—Subparagraph (B) shall not apply to a
decedent meeting the requirements of section
877(c)(1).
‘‘(D) CREDIT FOR FOREIGN GIFT TAXES.—
The tax imposed by this section solely by reason
of this paragraph shall be credited with the
amount of any gift tax actually paid to any for-
eign country in respect of any gift which is tax-
able under this section solely by reason of this
paragraph.’’
356
(f) COMPARABLE TREATMENT OF LAWFUL PERMA-
NENT RESIDENTS WHO CEASE TO BE TAXED AS RESI-
DENTS.—
(1) IN GENERAL.—Section 877 is amended by
redesignating subsection (e) as subsection (f) and by
inserting after subsection (d) the following new sub-
section:
‘‘(e) COMPARABLE TREATMENT OF LAWFUL PERMA-
NENT RESIDENTS WHO CEASE TO BE TAXED AS RESI-
DENTS.—
‘‘(1) IN GENERAL.—Any long-term resident of
the United States who—
‘‘(A) ceases to be a lawful permanent resi-
dent of the United States (within the meaning
of section 7701(b)(6)), or
‘‘(B) commences to be treated as a resi-
dent of a foreign country under the provisions
of a tax treaty between the United States and
the foreign country and who does not waive the
benefits of such treaty applicable to residents of
the foreign country,
shall be treated for purposes of this section and sec-
tions 2107, 2501, and 6039F in the same manner
as if such resident were a citizen of the United
357
States who lost United States citizenship on the date
of such cessation or commencement.
‘‘(2) LONG-TERM RESIDENT.—For purposes of
this subsection, the term ‘long-term resident’ means
any individual (other than a citizen of the United
States) who is a lawful permanent resident of the
United States in at least 8 taxable years during the
period of 15 taxable years ending with the taxable
year during which the event described in subpara-
graph (A) or (B) of paragraph (1) occurs. For pur-
poses of the preceding sentence, an individual shall
not be treated as a lawful permanent resident for
any taxable year if such individual is treated as a
resident of a foreign country for the taxable year
under the provisions of a tax treaty between the
United States and the foreign country and does not
waive the benefits of such treaty applicable to resi-
dents of the foreign country.
‘‘(3) SPECIAL RULES.—
‘‘(A) EXCEPTIONS NOT TO APPLY.—Sub-
section (c) shall not apply to an individual who
is treated as provided in paragraph (1).
‘‘(B) STEP-UP IN BASIS.—Solely for pur-
poses of determining any tax imposed by reason
of this subsection, property which was held by
358
the long-term resident on the date the individ-
ual first became a resident of the United States
shall be treated as having a basis on such date
of not less than the fair market value of such
property on such date. The preceding sentence
shall not apply if the individual elects not to
have such sentence apply. Such an election,
once made, shall be irrevocable.
‘‘(4) AUTHORITY TO EXEMPT INDIVIDUALS.—
This subsection shall not apply to an individual who
is described in a category of individuals prescribed
by regulation by the Secretary.
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to
carry out this subsection, including regulations pro-
viding for the application of this subsection in cases
where an alien individual becomes a resident of the
United States during the 10-year period after being
treated as provided in paragraph (1).’’
(2) CONFORMING AMENDMENTS.—
(A) Section 2107 is amended by striking
subsection (d), by redesignating subsection (e)
as subsection (d), and by inserting after sub-
section (d) (as so redesignated) the following
new subsection:
359
‘‘(e) CROSS REFERENCE.—
‘‘For comparable treatment of long-term lawful
permanent residents who ceased to be taxed as resi-
dents, see section 877(e).’’
(B) Paragraph (3) of section 2501(a) (as
amended by subsection (e)) is amended by add-
ing at the end the following new subparagraph:
‘‘(E) CROSS REFERENCE.—
‘‘For comparable treatment of long-term lawful
permanent residents who ceased to be taxed as resi-
dents, see section 877(e).’’
(g) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to—
(A) individuals losing United States citi-
zenship (within the meaning of section 877 of
the Internal Revenue Code of 1986) on or after
February 6, 1995, and
(B) long-term residents of the United
States with respect to whom an event described
in subparagraph (A) or (B) of section 877(e)(1)
of such Code occurs on or after February 6,
1995.
(2) SPECIAL RULE.—
(A) IN GENERAL.—In the case of an indi-
vidual who performed an act of expatriation
specified in paragraph (1), (2), (3), or (4) of
section 349(a) of the Immigration and Nation-