‘‘(E) is covered under a medical care pro-
gram described in the Indian Health Care Im-
provement Act.
‘‘(5) PRISONERS.—Amounts paid for coverage
of an individual for any month shall not be taken
into account under subsection (a) if, as of the first
day of such month, such individual is incarcerated
under Federal, State, or local authority pursuant to
a conviction for crime.
‘‘(c) LIMITATION BASED ON MODIFIED ADJUSTED
GROSS INCOME.—
‘‘(1) IN
GENERAL.—The aggregate amount
which would (but for this subsection) be allowed as
a credit under this section shall be reduced (but not
below zero) by the amount determined under para-
graph (2).
‘‘(2) AMOUNT OF REDUCTION.—
‘‘(A) IN
GENERAL.—The amount deter-
mined under this paragraph shall be the
amount which bears the same ratio to such ag-
gregate amount as—
‘‘(i) the excess of—
‘‘(I) the taxpayer’s modified ad-
justed gross income for such taxable
year, over
‘‘(II) 
the 
applicable 
dollar
amount, bears to
‘‘(ii) $15,000 ($30,000 in the case of
a joint return, surviving spouse, or head of
household).
‘‘(B) ROUNDING.—Any amount determined
under subparagraph (A) which is not a multiple
of $10 shall be rounded to the next lowest $10.
‘‘(3) MODIFIED
ADJUSTED
GROSS
INCOME.—
For purposes of this section, the term ‘modified ad-
justed gross income’ means adjusted gross income
increased by any amount excluded from gross in-
come under section 911, 931, or 933.
‘‘(4) APPLICABLE DOLLAR AMOUNT.—For pur-
poses of paragraph (2), the term ‘applicable dollar
amount’ means—
‘‘(A) $35,000 in the case of a taxpayer
whose qualified health coverage covers more
than 1 individual referred to in subsection (a)
and who files a joint return or a surviving
spouse,
‘‘(B) $30,000 in the case of a taxpayer
whose qualified health coverage covers more
than 1 individual referred to in subsection (a)
and who files a return as head of household,
and
‘‘(C) $20,000—
‘‘(i) in any case not described in sub-
paragraph (A) or (B), and
‘‘(ii) in the case of a married indi-
vidual filing a separate return.
For purposes of this paragraph, marital status shall
be determined under section 7703, and the terms
‘surviving spouse’ and ‘head of household’ shall have
the meanings given such terms by section 2.
‘‘(d) QUALIFIED HEALTH COVERAGE.—For purposes
of this section, the term ‘qualified health coverage’ means
health insurance coverage (as defined in section
9832(b)(1)) and coverage under a high deductible plan (as
defined in section 220(c)(2)), under a COBRA continu-
ation provision (as defined in section 9832(d)(1)), under
a group health plan (as defined in section 5000(b)(1)) pro-
viding medical care (as defined in section 9832(d)(3)), and
under a qualified high risk pool (as defined in section
2744(c)(2) of the Public Health Service Act).
‘‘(e) COORDINATION WITH ADVANCE PAYMENTS OF
CREDIT.—
‘‘(1) RECAPTURE
OF
EXCESS
ADVANCE
PAY-
MENTS.—If any payment is made by the Secretary
under section 7527 during any calendar year to a
person furnishing qualified health coverage for an
individual, then the tax imposed by this chapter for
the individual’s last taxable year beginning in such
calendar year shall be increased by the aggregate
amount of such payments.
‘‘(2) 
RECONCILIATION
OF
PAYMENTS
AD-
VANCED AND CREDIT ALLOWED.—Any increase in
tax under paragraph (1) shall not be treated as tax
imposed by this chapter for purposes of determining
the amount of any credit (other than the credit al-
lowed by subsection (a)(1)) allowable under this
part.
‘‘(f) ARCHER MSA CONTRIBUTIONS.—
‘‘(1) IN GENERAL.—If a deduction would (but
for paragraph (2)) be allowed under section 220 to
the taxpayer for a payment for the taxable year to
the Archer MSA of an individual, subsection (a)
shall be applied by treating such payment as a pay-
ment for qualified health coverage for such indi-
vidual.
‘‘(2) DENIAL OF DOUBLE BENEFIT.—No deduc-
tion shall be allowed under section 220 for that por-
tion of the payments otherwise allowable as a deduc-
tion under section 220 for the taxable year which is
equal to the amount of taken into account under
subsection (a) for such taxable year by reason of
this subsection.
‘‘(g) SPECIAL RULES.—
‘‘(1) EXCLUSION IF PARTICIPANT IN CAFETERIA
PLAN
OR
FLEXIBLE
SPENDING
ARRANGEMENT.—
Subsection (a) shall not apply to a taxpayer for a
taxable year if any amount is not includible in the
gross income of the taxpayer for such taxable year
by reason of section 106 with respect to—
‘‘(A) a benefit consisting of qualified
health coverage under a cafeteria plan (as de-
fined in section 125(d)), or
‘‘(B) a benefit consisting of qualified
health coverage under a flexible spending or
similar arrangement.
‘‘(2) COORDINATION WITH MEDICAL EXPENSE
DEDUCTION.—The amount which would (but for this
paragraph) be taken into account by the taxpayer
under section 213 for the taxable year shall be re-
duced by the amount taken into account under this
section for such year.
‘‘(3) COORDINATION
WITH
DEDUCTION
FOR
QUALIFIED HEALTH COVERAGE COSTS.—No credit
shall be allowed under this section for the taxable
year if any amount paid for qualified health cov-
erage is taken into account in determining the de-
duction allowed for such year under section 223.
‘‘(4) DENIAL OF CREDIT TO DEPENDENTS.—No
credit shall be allowed under this section to any indi-
vidual with respect to whom a deduction under sec-
tion 151 is allowable to another taxpayer for a tax-
able year beginning in the calendar year in which
such individual’s taxable year begins.
‘‘(5) MARRIED COUPLES MUST FILE JOINT RE-
TURN.—If the taxpayer is married at the close of
the taxable year, the credit shall be allowed under
subsection (a) only if the taxpayer and his spouse
file a joint return for the taxable year.
‘‘(6) MARITAL STATUS.—An individual legally
separated from his spouse under a decree of divorce
or of separate maintenance shall not be considered
as married.
‘‘(7) INFLATION ADJUSTMENT.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning after 2003, each dollar
amount in subsection (d)(4) shall be increased
by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 2002’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
of $100, such amount shall be rounded to the
next lowest multiple of $100.
‘‘(h) RESTRICTIONS ON TAXPAYERS WHO IMPROP-
ERLY CLAIMED CREDIT IN PRIOR YEAR.—For purposes of
this section, rules similar to the rules of section 32(k) shall
apply.’’.
(b) INFORMATION REPORTING.—
(1) IN GENERAL.—Subpart B of part III of
subchapter A of chapter 61 of such Code (relating
to information concerning transactions with other
persons) is amended by inserting after section
6050S the following new section:
‘‘SEC. 6050T. RETURNS RELATING TO HEALTH COVERAGE
CREDIT.
‘‘(a) 
REQUIREMENT
OF
REPORTING.—Every
person—
‘‘(1) who, in connection with a trade or busi-
ness conducted by such person, receives payments
during any calendar year from any individual for
qualified health coverage (as defined in section
35(d)) of such individual or any other individual,
and
‘‘(2) who claims a reimbursement for an ad-
vance credit amount,
shall, at such time as the Secretary may prescribe, make
the return described in subsection (b) with respect to each
individual from whom such payments were received or for
whom such a reimbursement is claimed.
‘‘(b) FORM AND MANNER OF RETURNS.—A return
is described in this subsection if such return—
‘‘(1) is in such form as the Secretary may pre-
scribe, and
‘‘(2) contains—
‘‘(A) the name, address, and TIN of each
individual referred to in subsection (a),
‘‘(B) the aggregate of the advance credit
amounts provided to such individual and for
which reimbursement is claimed,
‘‘(C) the number of months for which such
advance credit amounts are so provided, and
‘‘(D) such other information as the Sec-
retary may prescribe.
‘‘(c) STATEMENTS TO BE FURNISHED TO INDIVID-
UALS WITH RESPECT TO WHOM INFORMATION IS RE-
QUIRED.—Every person required to make a return under
subsection (a) shall furnish to each individual whose name
is required to be set forth in such return a written state-
ment showing—
‘‘(1) the name and address of the person re-
quired to make such return and the phone number
of the information contact for such person, and
‘‘(2) the information required to be shown on
the return with respect to such individual.
The written statement required under the preceding sen-
tence shall be furnished on or before January 31 of the
year following the calendar year for which the return
under subsection (a) is required to be made.
‘‘(d) ADVANCE CREDIT AMOUNT.—For purposes of
this section, the term ‘advance credit amount’ means an
amount for which the person can claim a reimbursement
pursuant to a program established by the Secretary under
section 7527.’’
(2) ASSESSABLE PENALTIES.—
(A) 
Subparagraph 
(B) 
of 
section
6724(d)(1) of such Code (relating to defini-
tions) is amended by redesignating clauses (xi)
through (xvii) as clauses (xii) through (xviii),
respectively, and by inserting after clause (x)
the following new clause:
‘‘(xi) section 6050T (relating to re-
turns relating to health coverage credit),’’.
(B) Paragraph (2) of section 6724(d) of
such Code is amended by striking ‘‘or’’ at the
end of subparagraph (Z), by striking the period
at the end of subparagraph (AA) and inserting
‘‘, or’’, and by adding after subparagraph (AA)
the following new subparagraph:
‘‘(BB) section 6050T (relating to returns
relating to health coverage credit).’’
(c) ADVANCE PAYMENT
OF HEALTH COVERAGE
CREDIT.—Chapter 77 of such Code (relating to miscella-
neous provisions) is amended by adding at the end the
following new section:
‘‘SEC. 7527. ADVANCE PAYMENT OF HEALTH COVERAGE
CREDIT.
‘‘(a) GENERAL RULE.—The Secretary shall establish
a program for making payments on behalf of eligible indi-
viduals to persons furnishing qualified health coverage for
such individuals.
‘‘(b) ELIGIBLE INDIVIDUAL.—For purposes of this
section—
‘‘(1) IN
GENERAL.—The term ‘eligible indi-
vidual’ means any individual for whom a qualified
health coverage credit eligibility certificate is in ef-
fect.
‘‘(2) CERTIFICATE
IN
EFFECT.—A qualified
health coverage credit eligibility certificate shall take
effect on the first day of a coverage month and shall
remain in effect with respect to the individual until
the earlier of revocation by the individual, another
such certificate takes effect under this section with
respect to the individual, or cancellation of the quali-
fied health coverage by the person furnishing such
coverage.
‘‘(3) COVERAGE
MONTH.—For purposes of
paragraph (2), the term ‘coverage month’ means any
month in which the eligible individual has coverage
under qualified health coverage (as defined in sec-
tion 35(d)) unless on the first day of such month
such individual is eligible for benefits or covered
under a program, as the case may be, described in
section 35(b)(4) or is described in section 35(b)(5).
‘‘(c) QUALIFIED HEALTH COVERAGE CREDIT ELIGI-
BILITY CERTIFICATE.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a qualified health coverage credit eligibility cer-
tificate is a statement certified by the person fur-
nishing qualified health coverage for an eligible indi-
vidual which—
‘‘(A) certifies that the individual is covered
by qualified health coverage as of the first day
of any month, and
‘‘(B) provides such other information as
the Secretary may require for purposes of this
section.
‘‘(2) RELIANCE ON INFORMATION PROVIDED BY
INDIVIDUALS.—In preparing the statement required
by paragraph (1), the such person may rely on any
representation made by the eligible individual with
respect to such statement unless such person has ac-
tual notice or knowledge (within the meaning of sec-
tion 6323(i)(1)) that any such representation is
false.
‘‘(3) DUTY
TO
PROVIDE
UPDATED
INFORMA-
TION.—If any information provided with respect to
the statement required by paragraph (1) is no longer
accurate, the person providing such statement shall
inform the person furnishing qualified health cov-
erage within 30 days of any change of information.
‘‘(d) QUALIFIED HEALTH COVERAGE.—For purposes
of this section, the term ‘qualified health coverage’ has the
meaning given such term by section 35(d).’’.
(d) TECHNICAL AMENDMENTS.—
(1) Paragraph (2) of section 1324(b) of title
31, United States Code, is amended by inserting ‘‘or
from section 35 of such Code’’ before the period at
the end.
(2) The table of sections for subpart C of part
IV of subchapter A of chapter 1 of the Internal Rev-
enue Code of 1986 is amended by striking the item
relating to section 35 and inserting the following
new items:
‘‘Sec. 35. Health coverage credit.
‘‘Sec. 36. Overpayments of tax.’’.
(3) The table of sections for subpart B of part
III of subchapter A of chapter 61 of such Code is
amended by inserting after the item relating to sec-
tion 6050S the following new item:
‘‘Sec. 6050T. Returns relating to health coverage credit.’’.
(4) The table of sections for chapter 77 of such
Code is amended by adding at the end the following
new item:
‘‘Sec. 7527. Advance payment of health coverage credit.’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 402. DEDUCTION FOR QUALIFIED HEALTH COVERAGE
COSTS OF EMPLOYEES AND OTHER INDIVID-
UALS INELIGIBLE FOR HEALTH COVERAGE
REFUNDABLE TAX CREDIT.
(a) IN GENERAL.—Part VII of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
additional itemized deductions) is amended by redesig-
nating section 223 as section 224 and by inserting after
section 222 the following new section:
‘‘SEC. 223. COSTS OF QUALIFIED HEALTH COVERAGE.
‘‘(a) IN GENERAL.—In the case of an individual,
there shall be allowed as a deduction an amount equal to
the amount paid during the taxable year for qualified
health coverage for the taxpayer and his spouse and de-
pendents.
‘‘(b) LIMITATIONS.—
‘‘(1) AMOUNT OF EMPLOYEE CONTRIBUTION TO
SUBSIDIZED
PLAN.—In the case of any year for
which the taxpayer is eligible to participate in any
subsidized health plan maintained by any employer
of the taxpayer or of the spouse of the taxpayer, the
amount allowed as a deduction under subsection (a)
for such year shall not exceed the amount paid by
the taxpayer for coverage under such plan for such
year. For purposes of the preceding sentence, all
health plans of persons treated as a single employer
under subsection (b), (c), or (m) of section 414 shall
be treated as 1 health plan.
‘‘(2) EMPLOYER
CONTRIBUTIONS
TO
CAFE-
TERIA PLANS, FLEXIBLE SPENDING ARRANGEMENTS,
AND ARCHER MSAS.—Amounts contributed to a
cafeteria plan, a flexible spending or similar arrange-
ment, or an Archer MSA which are excluded from
gross income under section 106 shall be treated as
paid by the employer and not by the individual.
‘‘(3) DENIAL OF DOUBLE BENEFIT.—No deduc-
tion shall be allowed under subsection (a) for a tax-
able year to any taxpayer allowed a credit under sec-
tion 35 for such taxable year.
‘‘(4) 
CERTAIN
OTHER
COVERAGE; 
PRIS-
ONERS.—Amounts paid for coverage of an individual
for any month shall not be taken into account under
subsection (a) if, as of the first day of such month,
such individual is eligible for benefits or covered
under a program, as the case may be, described in
section 35(b)(4) or is described in section 35(b)(5).
‘‘(5) 
ANCILLARY
COVERAGE
PREMIUMS.—
Amounts paid for coverage of an individual for ex-
cepted benefits (as defined in section 9832(c)) shall
not be taken into account under subsection (a).
‘‘(c) QUALIFIED HEALTH COVERAGE.—For purposes
of this section, the term ‘qualified health coverage’ has the
meaning given such term by section 35(d).
‘‘(d) COORDINATION WITH OTHER DEDUCTIONS.—
Amounts taken into account by the taxpayer in computing
the deduction under section 162(l) and in computing the
deduction under section 213 shall not be taken into ac-
count under subsection (a).
‘‘(e) ELECTION NOT TO HAVE SECTION APPLY.—A
taxpayer may elect not to have this section apply with re-
spect to amounts paid for qualified health coverage for any
taxable year.’’.
(b) DEDUCTION ALLOWED WHETHER OR NOT TAX-
PAYER ITEMIZES OTHER DEDUCTIONS.—Subsection (a)
of section 62 of such Code is amended by inserting after
paragraph (18) the following new item:
‘‘(19) QUALIFIED HEALTH COVERAGE COSTS.—
The deduction allowed by section 223.’’.
(c) CONFORMING AMENDMENTS.—The table of sec-
tions for part VII of subchapter B of chapter 1 of such
Code is amended by striking the last item and inserting
the following new items:
‘‘Sec. 223. Costs of qualified health coverage.
‘‘Sec. 224. Cross reference.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 403. CARRYOVER OF UNUSED BENEFITS FROM CAFE-
TERIA 
PLANS, 
FLEXIBLE 
SPENDING 
AR-
RANGEMENTS, 
AND 
HEALTH 
FLEXIBLE
SPENDING ACCOUNTS.
(a) IN GENERAL.—Section 125 of the Internal Rev-
enue Code of 1986 (relating to cafeteria plans) is amended
by redesignating subsections (h) and (i) as subsections (i)
and (j) and by inserting after subsection (g) the following
new subsection:
‘‘(h) ALLOWANCE OF CARRYOVERS OF UNUSED BEN-
EFITS TO LATER TAXABLE YEARS.—
‘‘(1) IN GENERAL.—For purposes of this title—
‘‘(A) notwithstanding subsection (d)(2), a
plan or other arrangement shall not fail to be
treated as a cafeteria plan or flexible spending
or similar arrangement, and
‘‘(B) no amount shall be required to be in-
cluded in gross income by reason of this section
or any other provision of this chapter,
solely because under such plan or other arrangement
any nontaxable benefit which is unused as of the
close of a taxable year may be carried forward to 1
or more succeeding taxable years.
‘‘(2) LIMITATION.—Paragraph (1) shall not
apply to amounts carried forward from a plan to the
extent such amounts exceed $500.’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
SEC. 404. EXCLUSION OF PREMIUM PAYMENTS FOR QUALI-
FIED HEALTH COVERAGE UNDER FLEXIBLE
SPENDING ARRANGEMENTS.
(a) IN GENERAL.—Section 106 of the Internal Rev-
enue Code of 1986 (relating to contributions by employer
to accident and health plans) is amended by adding at the
end the following new subsection:
‘‘(d) QUALIFIED HEALTH COVERAGE UNDER FLEXI-
BLE SPENDING ARRANGEMENT.—For purposes of sub-
section (a), amounts paid under a flexible spending or
similar arrangement (as defined in subsection (c)(2)) for
qualified health coverage (as defined in section 35(d))
shall be treated as employer-provided coverage under an
accident or health plan.’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
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