H. R. 3103—100
furnished as a part of (or together with) the application for such
policy.
‘‘(II) Whoever issues or sells a health insurance policy (other
than a policy described in subclause (III)) to an individual described
in subclause (I) and fails to furnish the appropriate disclosure
statement as required under such subclause shall be fined under
title 18, United States Code, or imprisoned not more than 5 years,
or both, and, in addition to or in lieu of such a criminal penalty,
is subject to a civil money penalty of not to exceed $25,000 (or
$15,000 in the case of a person other than the issuer of the policy)
for each such violation.
‘‘(III) A policy described in this subclause (to which subclauses
(I) and (II) do not apply) is a Medicare supplemental policy or
a health insurance policy identified under 60 Federal Register 30880
(June 12, 1995) as a policy not required to have a disclosure state-
ment.
‘‘(IV) Any reference in this section to the revised NAIC model
regulation (referred to in subsection (m)(1)(A)) is deemed a reference
to such regulation as revised by section 171(m)(2) of the Social
Security Act Amendments of 1994 (Public Law 103–432) and as
modified by substituting, for the disclosure required under section
16D(2), disclosure under subclause (I) of an appropriate disclosure
statement under clause (vii).
‘‘(vii) The disclosure statement described in this clause for
a type of policy is the statement specified under subparagraph
(D) of this paragraph (as in effect before the date of the enactment
of the Health Insurance Portability and Accountability Act of 1996)
for that type of policy, as revised as follows:
‘‘(I) In each statement, amend the second line to read
as follows:
‘THIS IS NOT MEDICARE SUPPLEMENT INSURANCE’.
‘‘(II) In each statement, strike the third line and insert
the following: ‘Some health care services paid for by Medi-
care may also trigger the payment of benefits under
this policy.’.
‘‘(III) In each statement not described in subclause (V),
strike the boldface matter that begins ‘This insurance’ and
all that follows up to the next paragraph that begins ‘Medi-
care’.
‘‘(IV) In each statement not described in subclause (V),
insert before the boxed matter (that states ‘Before You Buy
This Insurance’) the following: ‘This policy must pay bene-
fits without regard to other health benefit coverage to
which you may be entitled under Medicare or other
insurance.’.
‘‘(V) In a statement relating to policies providing both nurs-
ing home and non-institutional coverage, to policies providing
nursing home benefits only, or policies providing home care
benefits only, amend the sentence that begins ‘Federal law’
to read as follows: ‘Federal law requires us to inform you
that in certain situations this insurance may pay for some
care also covered by Medicare.’.
‘‘(viii)(I) Subject to subclause (II), nothing in this subparagraph
shall restrict or preclude a State’s ability to regulate health insur-
H. R. 3103—101
ance policies, including any health insurance policy that is described
in clause (iv), (v), or (vi)(III).
‘‘(II) A State may not declare or specify, in statute, regulation,
or otherwise, that a health insurance policy (other than a Medicare
supplemental policy) or rider to an insurance contract which is
not a health insurance policy, that is described in clause (iv),
(v), or (vi)(III) and that is sold, issued, or renewed to an individual
entitled to benefits under part A or enrolled under part B ‘dupli-
cates’ health benefits under this title or under a Medicare supple-
mental policy.’’.
(b) CONFORMING AMENDMENTS.—Section 1882(d)(3) (42 U.S.C.
1395ss(d)(3)) is amended—
(1) in subparagraph (C)—
(A) by striking ‘‘with respect to (i)’’ and inserting ‘‘with
respect to’’, and
(B) by striking ‘‘, (ii) the sale’’ and all that follows
up to the period at the end; and
(2) by striking subparagraph (D).
(c) TRANSITIONAL PROVISION.—
(1) NO PENALTIES.—Subject to paragraph (3), no criminal
or civil money penalty may be imposed under section
1882(d)(3)(A) of the Social Security Act for any act or omission
that occurred during the transition period (as defined in para-
graph (4)) and that relates to any health insurance policy
that is described in clause (iv) or (v) of such section (as amended
by subsection (a)).
(2) LIMITATION ON LEGAL ACTION.—Subject to paragraph
(3), no legal action shall be brought or continued in any Federal
or State court insofar as such action—
(A) includes a cause of action which arose, or which
is based on or evidenced by any act or omission which
occurred, during the transition period; and
(B) relates to the application of section 1882(d)(3)(A)
of the Social Security Act to any act or omission with
respect to the sale, issuance, or renewal of any health
insurance policy that is described in clause (iv) or (v) of
such section (as amended by subsection (a)).
(3) DISCLOSURE
CONDITION.—In the case of a policy
described in clause (iv) of section 1882(d)(3)(A) of the Social
Security Act that is sold or issued on or after the effective
date of statements under section 171(d)(3)(C) of the Social
Security Act Amendments of 1994 and before the end of the
30-day period beginning on the date of the enactment of this
Act, paragraphs (1) and (2) shall only apply if disclosure was
made in accordance with section 1882(d)(3)(C)(ii) of the Social
Security Act (as in effect before the date of the enactment
of this Act).
(4) TRANSITION
PERIOD.—In this subsection, the term
‘‘transition period’’ means the period beginning on November
5, 1991, and ending on the date of the enactment of this
Act.
(d) EFFECTIVE DATE.—(1) Except as provided in this subsection,
the amendment made by subsection (a) shall be effective as if
included in the enactment of section 4354 of the Omnibus Budget
Reconciliation Act of 1990.
H. R. 3103—102
(2)(A) Clause (vi) of section 1882(d)(3)(A) of the Social Security
Act, as added by subsection (a), shall only apply to individuals
applying for—
(i) a health insurance policy described in section
1882(d)(3)(A)(iv) of such Act (as added by subsection (a)), after
the date of the enactment of this Act, or
(ii) another health insurance policy after the end of the
30-day period beginning on the date of the enactment of this
Act.
(B) A seller or issuer of a health insurance policy may sub-
stitute, for the disclosure statement described in clause (vii) of
such section, the statement specified under section 1882(d)(3)(D)
of the Social Security Act (as in effect before the date of the
enactment of this Act), without the revision specified in such clause.
TITLE III—TAX-RELATED HEALTH
PROVISIONS
SEC. 300. 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 provision, the reference shall
be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
Subtitle A—Medical Savings Accounts
SEC. 301. MEDICAL SAVINGS ACCOUNTS.
(a) IN GENERAL.—Part VII of subchapter B of chapter 1 (relating
to additional itemized deductions for individuals) is amended by
redesignating section 220 as section 221 and by inserting after
section 219 the following new section:
‘‘SEC. 220. MEDICAL SAVINGS ACCOUNTS.
‘‘(a) DEDUCTION ALLOWED.—In the case of an individual 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.—The amount allowable as a deduction
under subsection (a) to an individual for the taxable year shall
not exceed the sum of the monthly limitations for months
during such taxable year that the individual is an eligible
individual.
‘‘(2) MONTHLY LIMITATION.—The monthly limitation for any
month is the amount equal to 1⁄12 of—
‘‘(A) in the case of an individual who has self-only
coverage under the high deductible health plan as of the
first day of such month, 65 percent of the annual deductible
under such coverage, and
‘‘(B) in the case of an individual who has family cov-
erage under the high deductible health plan as of the
H. R. 3103—103
first day of such month, 75 percent of the annual deductible
under such coverage.
‘‘(3) SPECIAL RULE FOR MARRIED INDIVIDUALS.—In the case
of individuals who are married to each other, if either spouse
has family coverage—
‘‘(A) both spouses shall be treated as having only such
family coverage (and if such spouses each have family
coverage under different plans, as having the family cov-
erage with the lowest annual deductible), and
‘‘(B) the limitation under paragraph (1) (after the
application of subparagraph (A) of this paragraph) shall
be divided equally between them unless they agree on
a different division.
‘‘(4) DEDUCTION NOT TO EXCEED COMPENSATION.—
‘‘(A) EMPLOYEES.—The deduction allowed under sub-
section (a) for contributions as an eligible individual
described in subclause (I) of subsection (c)(1)(A)(iii) shall
not exceed such individual’s wages, salaries, tips, and other
employee compensation which are attributable to such
individual’s employment by the employer referred to in
such subclause.
‘‘(B) 
SELF-EMPLOYED
INDIVIDUALS.—The 
deduction
allowed under subsection (a) for contributions as an eligible
individual described in subclause (II) of subsection
(c)(1)(A)(iii) shall not exceed such individual’s earned
income (as defined in section 401(c)(1)) derived by the
taxpayer from the trade or business with respect to which
the high deductible health plan is established.
‘‘(C) COMMUNITY PROPERTY LAWS NOT TO APPLY.—The
limitations under this paragraph shall be determined with-
out regard to community property laws.
‘‘(5) COORDINATION WITH EXCLUSION FOR EMPLOYER CON-
TRIBUTIONS.—No deduction shall be allowed under this section
for any amount paid for any taxable year to a medical savings
account of an individual if—
‘‘(A) any amount is contributed to any medical savings
account of such individual for such year which is excludable
from gross income under section 106(b), or
‘‘(B) if such individual’s spouse is covered under the
high deductible health plan covering such individual, any
amount is contributed for such year to any medical savings
account of such spouse which is so excludable.
‘‘(6) DENIAL OF DEDUCTION TO DEPENDENTS.—No deduction
shall be allowed under this section to any individual with
respect to whom a deduction under section 151 is allowable
to another taxpayer for a taxable year beginning in the calendar
year in which such individual’s taxable year begins.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) ELIGIBLE INDIVIDUAL.—
‘‘(A) IN GENERAL.—The term ‘eligible individual’ means,
with respect to any month, any individual if—
‘‘(i) such individual is covered under a high deduct-
ible health plan as of the 1st day of such month,
‘‘(ii) such individual is not, while covered under
a high deductible health plan, covered under any
health plan—
H. R. 3103—104
‘‘(I) which is not a high deductible health plan,
and
‘‘(II) which provides coverage for any benefit
which is covered under the high deductible health
plan, and
‘‘(iii)(I) the high deductible health plan covering
such individual is established and maintained by
the employer of such individual or of the spouse of
such individual and such employer is a small employer,
or
‘‘(II) such individual is an employee (within the
meaning of section 401(c)(1)) or the spouse of such
an employee and the high deductible health plan cover-
ing such individual is not established or maintained
by any employer of such individual or spouse.
‘‘(B) CERTAIN COVERAGE DISREGARDED.—Subparagraph
(A)(ii) shall be applied without regard to—
‘‘(i) coverage for any benefit provided by permitted
insurance, and
‘‘(ii) coverage (whether through insurance or other-
wise) for accidents, disability, dental care, vision care,
or long-term care.
‘‘(C) CONTINUED ELIGIBILITY OF EMPLOYEE AND SPOUSE
ESTABLISHING MEDICAL SAVINGS ACCOUNTS.—If, while an
employer is a small employer—
‘‘(i) any amount is contributed to a medical savings
account of an individual who is an employee of such
employer or the spouse of such an employee, and
‘‘(ii) such amount is excludable from gross income
under section 106(b) or allowable as a deduction under
this section,
such individual shall not cease to meet the requirement
of subparagraph (A)(iii)(I) by reason of such employer ceas-
ing to be a small employer so long as such employee contin-
ues to be an employee of such employer.
‘‘(D) LIMITATIONS ON ELIGIBILITY.—
‘‘For limitations on number of taxpayers who are eligible to have
medical savings accounts, see subsection (i).
‘‘(2) HIGH DEDUCTIBLE HEALTH PLAN.—
‘‘(A) IN GENERAL.—The term ‘high deductible health
plan’ means a health plan—
‘‘(i) in the case of self-only coverage, which has
an annual deductible which is not less than $1,500
and not more than $2,250,
‘‘(ii) in the case of family coverage, which has
an annual deductible which is not less than $3,000
and not more than $4,500, and
‘‘(iii) the annual out-of-pocket expenses required
to be paid under the plan (other than for premiums)
for covered benefits does not exceed—
‘‘(I) $3,000 for self-only coverage, and
‘‘(II) $5,500 for family coverage.
‘‘(B) SPECIAL RULES.—
‘‘(i) EXCLUSION OF CERTAIN PLANS.—Such term does
not include a health plan if substantially all of its
coverage is coverage described in paragraph (1)(B).
H. R. 3103—105
‘‘(ii) SAFE HARBOR FOR ABSENCE OF PREVENTIVE
CARE DEDUCTIBLE.—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 absence
of a deductible for such care is required by State law.
‘‘(3) PERMITTED INSURANCE.—The term ‘permitted insur-
ance’ means—
‘‘(A) Medicare supplemental insurance,
‘‘(B) insurance if substantially all of the coverage pro-
vided under such insurance relates to—
‘‘(i) liabilities incurred under workers’ compensa-
tion laws,
‘‘(ii) tort liabilities,
‘‘(iii) liabilities relating to ownership or use of prop-
erty, or
‘‘(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.
‘‘(4) SMALL EMPLOYER.—
‘‘(A) IN GENERAL.—The term ‘small employer’ means,
with respect to any calendar year, any employer if such
employer employed an average of 50 or fewer employees
on business days during either of the 2 preceding calendar
years. For purposes of the preceding sentence, a preceding
calendar year may be taken into account only if the
employer was in existence throughout such year.
‘‘(B) EMPLOYERS
NOT
IN
EXISTENCE
IN
PRECEDING
YEAR.—In the case of an employer which was not in exist-
ence throughout the 1st preceding calendar year, the deter-
mination under subparagraph (A) shall be based on the
average number of employees that it is reasonably expected
such employer will employ on business days in the current
calendar year.
‘‘(C) CERTAIN GROWING EMPLOYERS RETAIN TREATMENT
AS SMALL EMPLOYER.—The term ‘small employer’ includes,
with respect to any calendar year, any employer if—
‘‘(i) such employer met the requirement of subpara-
graph (A) (determined without regard to subparagraph
(B)) for any preceding calendar year after 1996,
‘‘(ii) any amount was contributed to the medical
savings account of any employee of such employer with
respect to coverage of such employee under a high
deductible health plan of such employer during such
preceding calendar year and such amount was exclud-
able from gross income under section 106(b) or allow-
able as a deduction under this section, and
‘‘(iii) such employer employed an average of 200
or fewer employees on business days during each
preceding calendar year after 1996.
‘‘(D) SPECIAL RULES.—
‘‘(i) CONTROLLED
GROUPS.—For purposes of this
paragraph, all persons treated as a single employer
under subsection (b), (c), (m), or (o) of section 414
shall be treated as 1 employer.
H. R. 3103—106
‘‘(ii) PREDECESSORS.—Any reference in this para-
graph to an employer shall include a reference to any
predecessor of such employer.
‘‘(5) FAMILY
COVERAGE.—The term ‘family coverage’
means any coverage other than self-only coverage.
‘‘(d) MEDICAL
SAVINGS
ACCOUNT.—For purposes of this
section—
‘‘(1) MEDICAL SAVINGS ACCOUNT.—The term ‘medical sav-
ings account’ means a trust created or organized in the United
States exclusively for the purpose of paying the qualified medi-
cal expenses of the account holder, but only if the written
governing instrument creating the trust meets the following
requirements:
‘‘(A) Except in the case of a rollover contribution
described in subsection (f)(5), no contribution 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 75 percent of the highest annual limit
deductible permitted under subsection (c)(2)(A)(ii) for
such calendar year.
‘‘(B) The trustee is a bank (as defined in section 408(n)),
an insurance company (as defined in section 816), or
another person who demonstrates to the satisfaction of
the Secretary that the manner in which such person will
administer the trust will be consistent with the require-
ments of this section.
‘‘(C) No part of the trust assets will be invested 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 account holder,
amounts paid by such holder for medical care (as defined
in section 213(d)) for such individual, the spouse of such
individual, and any dependent (as 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.—
‘‘(i) IN
GENERAL.—Subparagraph (A) shall not
apply to any payment for insurance.
‘‘(ii) EXCEPTIONS.—Clause (i) shall not apply to
any expense for coverage under—
‘‘(I) a health plan during any period of continu-
ation coverage required under any Federal law,
‘‘(II) a qualified long-term care insurance con-
tract (as defined in section 7702B(b)), or
‘‘(III) a health plan during a period in which
the individual is receiving unemployment com-
pensation under any Federal or State law.
H. R. 3103—107
‘‘(C) MEDICAL EXPENSES OF INDIVIDUALS WHO ARE NOT
ELIGIBLE INDIVIDUALS.—Subparagraph (A) shall apply to
an amount paid by an account holder for medical care
of an individual who is not an eligible individual for the
month in which the expense for such care is incurred
only if no amount is contributed (other than a rollover
contribution) to any medical savings account of such
account holder for the taxable year which includes such
month. This subparagraph shall not apply to any expense
for coverage described in subclause (I) or (III) of subpara-
graph (B)(ii).
‘‘(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 follow-
ing rules shall apply for purposes of this section:
‘‘(A) Section 219(d)(2) (relating to no deduction for roll-
overs).
‘‘(B) Section 219(f)(3) (relating to time when contribu-
tions deemed made).
‘‘(C) Except as provided in section 106(b), section
219(f)(5) (relating to employer payments).
‘‘(D) Section 408(g) (relating to community 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 account. Notwithstanding the
preceding sentence, any such account is subject to the taxes
imposed by section 511 (relating to imposition of tax on unre-
lated 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.—
‘‘(1) AMOUNTS USED FOR QUALIFIED MEDICAL EXPENSES.—
Any amount paid or distributed out of a medical savings account
which is used exclusively to pay qualified medical expenses
of any account holder shall not be includible in gross income.
‘‘(2) INCLUSION OF AMOUNTS NOT USED FOR QUALIFIED MEDI-
CAL EXPENSES.—Any amount paid or distributed out of a medi-
cal savings account which is not used exclusively to pay the
qualified medical expenses of the account holder shall be
included in the gross income of such holder.
‘‘(3) EXCESS CONTRIBUTIONS RETURNED BEFORE DUE DATE
OF RETURN.—
‘‘(A) IN GENERAL.—If any excess contribution is contrib-
uted for a taxable year to any medical savings account
of an individual, paragraph (2) shall not apply to distribu-
tions from the medical savings accounts of such individual
(to the extent such distributions do not exceed the aggre-
gate excess contributions to all such accounts of such
individual for such year) if—
H. R. 3103—108
‘‘(i) 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
‘‘(ii) such distribution is accompanied by the
amount of net income attributable to such excess con-
tribution.
Any net income described in clause (ii) shall be included
in the gross income of the individual for the taxable year
in which it is received.
‘‘(B) EXCESS CONTRIBUTION.—For purposes of subpara-
graph (A), the term ‘excess contribution’ means any con-
tribution (other than a rollover contribution) which is nei-
ther excludable from gross income under section 106(b)
nor deductible under this section.
‘‘(4) ADDITIONAL
TAX
ON
DISTRIBUTIONS
NOT
USED
FOR
QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by this chapter
on the account holder for any taxable year in which there
is a payment or distribution from a medical savings account
of such holder which is includible in gross income under
paragraph (2) shall be increased by 15 percent of the
amount which is so includible.
‘‘(B) EXCEPTION FOR DISABILITY OR DEATH.—Subpara-
graph (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 MEDICARE
ELIGIBILITY.—Subparagraph (A) shall not apply to any pay-
ment or distribution after the date on which the account
holder attains the age specified in section 1811 of the
Social Security Act.
‘‘(5) ROLLOVER CONTRIBUTION.—An amount is described in
this paragraph as a rollover contribution if it meets the require-
ments 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 payment or dis-
tribution.
‘‘(B) LIMITATION.—This paragraph shall not apply to
any amount described in subparagraph (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
receipt, 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 application of this paragraph.
‘‘(6) COORDINATION WITH MEDICAL EXPENSE DEDUCTION.—
For purposes of determining the amount of the deduction under
section 213, any payment or distribution out of a medical sav-
ings account for qualified medical expenses shall not be treated
as an expense paid for medical care.
‘‘(7) TRANSFER
OF
ACCOUNT
INCIDENT
TO
DIVORCE.—The
transfer of an individual’s interest in a medical savings account
H. R. 3103—109
to an individual’s spouse or former spouse under a divorce
or separation instrument described in subparagraph (A) of sec-
tion 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 such spouse
is the account holder.
‘‘(8) TREATMENT AFTER DEATH OF ACCOUNT HOLDER.—
‘‘(A) TREATMENT
IF
DESIGNATED
BENEFICIARY
IS
SPOUSE.—If the account holder’s surviving spouse acquires
such holder’s interest in a medical savings account by
reason of being the designated beneficiary of such account
at the death of the account holder, such medical savings
account shall be treated as if the spouse were the account
holder.
‘‘(B) OTHER CASES.—
‘‘(i) IN
GENERAL.—If, by reason of the death of
the account holder, any person acquires the account
holder’s interest in a medical savings account in a
case to which subparagraph (A) does not apply—
‘‘(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 account on such date shall
be includible if such person is not the estate of
such holder, in such person’s gross income for the
taxable year which includes such date, or if such
person is the estate of such holder, in such holder’s
gross income for the last taxable year of such
holder.
‘‘(ii) SPECIAL RULES.—
‘‘(I) REDUCTION OF INCLUSION FOR PRE-DEATH
EXPENSES.—The amount includible in gross income
under clause (i) by any person (other than the
estate) shall be reduced by the amount of qualified
medical expenses which were incurred by the
decedent before the date of the decedent’s death
and paid by such person within 1 year after such
date.
‘‘(II) DEDUCTION
FOR
ESTATE
TAXES.—An
appropriate deduction shall be allowed under sec-
tion 691(c) to any person (other than the decedent
or the decedent’s spouse) with respect to amounts
included in gross income under clause (i) by such
person.
‘‘(g) COST-OF-LIVING ADJUSTMENT.—In the case of any taxable
year beginning in a calendar year after 1998, each dollar amount
in subsection (c)(2) shall be increased by an amount equal to—
‘‘(1) such dollar amount, multiplied by
‘‘(2) the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which such taxable year begins
by substituting ‘calendar year 1997’ for ‘calendar year 1992’
in subparagraph (B) thereof.
If any increase under the preceding sentence is not a multiple
of $50, such increase shall be rounded to the nearest multiple
of $50.
H. R. 3103—110
‘‘(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 account holder with respect
to contributions, distributions, and such other matters as the Sec-
retary determines appropriate. The reports required by this sub-
section shall be filed at such time and in such manner and furnished
to such individuals at such time and in such manner as may
be required by the Secretary.
‘‘(i) LIMITATION ON NUMBER OF TAXPAYERS HAVING MEDICAL
SAVINGS ACCOUNTS.—
‘‘(1) IN GENERAL.—Except as provided in paragraph (5),
no individual shall be treated as an eligible individual for
any taxable year beginning after the cut-off year unless—
‘‘(A) such individual was an active MSA participant
for any taxable year ending on or before the close of the
cut-off year, or
‘‘(B) such individual first became an active MSA partici-
pant for a taxable year ending after the cut-off year by
reason of coverage under a high deductible health plan
of an MSA–participating employer.
‘‘(2) CUT-OFF YEAR.—For purposes of paragraph (1), the
term ‘cut-off year’ means the earlier of—
‘‘(A) calendar year 2000, or
‘‘(B) the first calendar year before 2000 for which the
Secretary determines under subsection (j) that the numeri-
cal limitation for such year has been exceeded.
‘‘(3) ACTIVE MSA PARTICIPANT.—For purposes of this sub-
section—
‘‘(A) IN GENERAL.—The term ‘active MSA participant’
means, with respect to any taxable year, any individual
who is the account holder of any medical savings account
into which any contribution was made which was exclud-
able from gross income under section 106(b), or allowable
as a deduction under this section, for such taxable year.
‘‘(B) SPECIAL RULE FOR CUT-OFF YEARS BEFORE 2000.—
In the case of a cut-off year before 2000—
‘‘(i) an individual shall not be treated as an eligible
individual for any month of such year or an active
MSA participant under paragraph (1)(A) unless such
individual is, on or before the cut-off date, covered
under a high deductible health plan, and
‘‘(ii) an employer shall not be treated as an MSA-
participating employer unless the employer, on or
before the cut-off date, offered coverage under a high
deductible health plan to any employee.
‘‘(C) 
CUT-OFF
DATE.—For 
purposes 
of 
subpara-
graph (B)—
‘‘(i) IN
GENERAL.—Except as otherwise provided
in this subparagraph, the cut-off date is October 1
of the cut-off year.
‘‘(ii) EMPLOYEES WITH ENROLLMENT PERIODS AFTER
OCTOBER
1.—In the case of an individual described
in subclause (I) of subsection (c)(1)(A)(iii), if the regu-
larly scheduled enrollment period for health plans of
the individual’s employer occurs during the last 3
months of the cut-off year, the cut-off date is December
31 of the cut-off year.
H. R. 3103—111
‘‘(iii) SELF-EMPLOYED INDIVIDUALS.—In the case of
an individual described in subclause (II) of subsection
(c)(1)(A)(iii), the cut-off date is November 1 of the cut-
off year.
‘‘(iv) SPECIAL RULES FOR 1997.—If 1997 is a cut-
off year by reason of subsection (j)(1)(A)—
‘‘(I) each of the cut-off dates under clauses
(i) and (iii) shall be 1 month earlier than the
date determined without regard to this clause, and
‘‘(II) clause (ii) shall be applied by substituting
‘4 months’ for ‘3 months’.
‘‘(4) MSA-PARTICIPATING EMPLOYER.—For purposes of this
subsection, the term ‘MSA-participating employer’ means any
small employer if—
‘‘(A) such employer made any contribution to the medi-
cal savings account of any employee during the cut-off
year or any preceding calendar year which was excludable
from gross income under section 106(b), or
‘‘(B) at least 20 percent of the employees of such
employer who are eligible individuals for any month of
the cut-off year by reason of coverage under a high deduct-
ible health plan of such employer each made a contribution
of at least $100 to their medical savings accounts for any
taxable year ending with or within the cut-off year which
was allowable as a deduction under this section.
‘‘(5) ADDITIONAL ELIGIBILITY AFTER CUT-OFF YEAR.—If the
Secretary determines under subsection (j)(2)(A) that the
numerical limit for the calendar year following a cut-off year
described in paragraph (2)(B) has not been exceeded—
‘‘(A) this subsection shall not apply to any otherwise
eligible individual who is covered under a high deductible
health plan during the first 6 months of the second calendar
year following the cut-off year (and such individual shall
be treated as an active MSA participant for purposes of
this subsection if a contribution is made to any medical
savings account with respect to such coverage), and
‘‘(B) any employer who offers coverage under a high
deductible health plan to any employee during such 6-
month period shall be treated as an MSA-participating
employer for purposes of this subsection if the requirements
of paragraph (4) are met with respect to such coverage.
For purposes of this paragraph, subsection (j)(2)(A) shall be
applied for 1998 by substituting ‘750,000’ for ‘600,000’.
‘‘(j) DETERMINATION
OF
WHETHER
NUMERICAL
LIMITS
ARE
EXCEEDED.—
‘‘(1) DETERMINATION
OF
WHETHER
LIMIT
EXCEEDED
FOR
1997.—The numerical limitation for 1997 is exceeded if, based
on the reports required under paragraph (4), the number of
medical savings accounts established as of—
‘‘(A) April 30, 1997, exceeds 375,000, or
‘‘(B) June 30, 1997, exceeds 525,000.
‘‘(2) DETERMINATION OF WHETHER LIMIT EXCEEDED FOR 1998
OR 1999.—
‘‘(A) IN GENERAL.—The numerical limitation for 1998
or 1999 is exceeded if the sum of—
H. R. 3103—112
‘‘(i) the number of MSA returns filed on or before
April 15 of such calendar year for taxable years ending
with or within the preceding calendar year, plus
‘‘(ii) the Secretary’s estimate (determined on the
basis of the returns described in clause (i)) of the
number of MSA returns for such taxable years which
will be filed after such date,
exceeds 600,000 (750,000 in the case of 1999). For purposes
of the preceding sentence, the term ‘MSA return’ means
any return on which any exclusion is claimed under section
106(b) or any deduction is claimed under this section.
‘‘(B) ALTERNATIVE COMPUTATION OF LIMITATION.—The
numerical limitation for 1998 or 1999 is also exceeded
if the sum of—
‘‘(i) 90 percent of the sum determined under
subparagraph (A) for such calendar year, plus
‘‘(ii) the product of 2.5 and the number of medical
savings accounts established during the portion of such
year preceding July 1 (based on the reports required
under paragraph (4)) for taxable years beginning in
such year,
exceeds 750,000.
‘‘(3) PREVIOUSLY
UNINSURED
INDIVIDUALS
NOT
INCLUDED
IN DETERMINATION.—
‘‘(A) IN GENERAL.—The determination of whether any
calendar year is a cut-off year shall be made by not count-
ing the medical savings account of any previously unin-
sured individual.
‘‘(B) PREVIOUSLY
UNINSURED
INDIVIDUAL.—For pur-
poses of this subsection, the term ‘previously uninsured
individual’ means, with respect to any medical savings
account, any individual who had no health plan coverage
(other than coverage referred to in subsection (c)(1)(B))
at any time during the 6-month period before the date
such individual’s coverage under the high deductible health
plan commences.
‘‘(4) REPORTING BY MSA TRUSTEES.—
‘‘(A) IN GENERAL.—Not later than August 1 of 1997,
1998, and 1999, each person who is the trustee of a medical
savings account established before July 1 of such calendar
year shall make a report to the Secretary (in such form
and manner as the Secretary shall specify) which speci-
fies—
‘‘(i) the number of medical savings accounts estab-
lished before such July 1 (for taxable years beginning
in such calendar year) of which such person is the
trustee,
‘‘(ii) the name and TIN of the account holder of
each such account, and
‘‘(iii) the number of such accounts which are
accounts of previously uninsured individuals.
‘‘(B) ADDITIONAL
REPORT
FOR
1997.—Not later than
June 1, 1997, each person who is the trustee of a medical
savings account established before May 1, 1997, shall make
an additional report described in subparagraph (A) but
only with respect to accounts established before May 1,
1997.
H. R. 3103—113
‘‘(C) PENALTY FOR FAILURE TO FILE REPORT.—The pen-
alty provided in section 6693(a) shall apply to any report
required by this paragraph, except that—
‘‘(i) such section shall be applied by substituting
‘$25’ for ‘$50’, and
‘‘(ii) the maximum penalty imposed on any trustee
shall not exceed $5,000.
‘‘(D) AGGREGATION OF ACCOUNTS.—To the extent prac-
ticable, in determining the number of medical savings
accounts on the basis of the reports under this paragraph,
all medical savings accounts of an individual shall be
treated as 1 account and all accounts of individuals who
are married to each other shall be treated as 1 account.
‘‘(5) DATE OF MAKING DETERMINATIONS.—Any determination
under this subsection that a calendar year is a cut-off year
shall be made by the Secretary and shall be published not
later than October 1 of such year.’’.
(b) DEDUCTION
ALLOWED
WHETHER
OR
NOT
INDIVIDUAL
ITEMIZES OTHER DEDUCTIONS.—Subsection (a) of section 62 is
amended by inserting after paragraph (15) the following new para-
graph:
‘‘(16) MEDICAL SAVINGS ACCOUNTS.—The deduction 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 sec-
tion, gross income of an employee does not include employer-pro-
vided coverage under an accident or health plan.
‘‘(b) CONTRIBUTIONS TO MEDICAL SAVINGS ACCOUNTS.—
‘‘(1) IN GENERAL.—In the case of an employee who is an
eligible individual, amounts contributed by such employee’s
employer to any medical savings account of such employee
shall be treated as employer-provided coverage for medical
expenses under an accident or health plan to the extent such
amounts do not exceed the limitation under section 220(b)(1)
(determined without regard to this subsection) which is
applicable to such employee for such taxable year.
‘‘(2) NO
CONSTRUCTIVE
RECEIPT.—No amount shall be
included in the gross income of any employee solely because
the employee may choose between the contributions referred
to in paragraph (1) and employer contributions to another
health plan of the employer.
‘‘(3) SPECIAL RULE FOR DEDUCTION OF EMPLOYER CONTRIBU-
TIONS.—Any employer contribution to a medical savings
account, if otherwise allowable as a deduction under this chap-
ter, shall be allowed only for the taxable year in which paid.
‘‘(4) EMPLOYER MSA CONTRIBUTIONS REQUIRED TO BE SHOWN
ON RETURN.—Every individual required to file a return under
section 6012 for the taxable year shall include on such return
the aggregate amount contributed by employers to the medical
savings accounts of such individual or such individual’s spouse
for such taxable year.
‘‘(5) MSA CONTRIBUTIONS NOT PART OF COBRA COVERAGE.—
Paragraph (1) shall not apply for purposes of section 4980B.
H. R. 3103—114
‘‘(6) DEFINITIONS.—For purposes of this subsection, the
terms ‘eligible individual’ and ‘medical savings account’ have
the respective meanings given to such terms by section 220.
‘‘(7) CROSS REFERENCE.—
‘‘For penalty on failure by employer to make comparable con-
tributions to the medical savings accounts of comparable employ-
ees, see section 4980E.’’.
(2) EXCLUSION FROM EMPLOYMENT TAXES.—
(A) RAILROAD RETIREMENT TAX.—Subsection (e) of sec-
tion 3231 is amended by adding at the end the following
new paragraph:
‘‘(10) MEDICAL
SAVINGS
ACCOUNT
CONTRIBUTIONS.—The
term ‘compensation’ shall not include 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).’’.
(B) UNEMPLOYMENT
TAX.—Subsection (b) of section
3306 is amended by striking ‘‘or’’ at the end of paragraph
(15), by striking the period 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).’’.
(C) WITHHOLDING TAX.—Subsection (a) of section 3401
is amended by striking ‘‘or’’ at the end of paragraph (19),
by striking the period 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).’’
(3) EMPLOYER CONTRIBUTIONS REQUIRED TO BE SHOWN ON
W–2.—Subsection (a) of section 6051 is amended by striking
‘‘and’’ at the end of paragraph (9), by striking the period at
the end of paragraph (10) and inserting ‘‘, and’’, and by inserting
after paragraph (10) the following new paragraph:
‘‘(11) the amount contributed to any medical savings
account (as defined in section 220(d)) of such employee or
such employee’s spouse.’’.
(4) PENALTY
FOR
FAILURE
OF
EMPLOYER
TO
MAKE
COM-
PARABLE MSA CONTRIBUTIONS.—
(A) IN GENERAL.—Chapter 43 is amended by adding
after section 4980D the following new section:
‘‘SEC. 4980E. FAILURE 
OF 
EMPLOYER 
TO 
MAKE 
COMPARABLE
MEDICAL SAVINGS ACCOUNT CONTRIBUTIONS.
‘‘(a) GENERAL RULE.—In the case of an employer who makes
a contribution to the medical savings account of any employee
with respect to coverage under a high deductible health plan of
the employer during a calendar year, there is hereby imposed
a tax on the failure of such employer to meet the requirements
of subsection (d) for such calendar year.
‘‘(b) AMOUNT
OF TAX.—The amount of the tax imposed by
subsection (a) on any failure for any calendar year is the amount
H. R. 3103—115
equal to 35 percent of the aggregate amount contributed by the
employer to medical savings accounts of employees for taxable
years of such employees ending with or within such calendar year.
‘‘(c) WAIVER BY SECRETARY.—In the case of a failure which
is due to reasonable cause and not to willful neglect, the Secretary
may waive part or all of the tax imposed by subsection (a) to
the extent that the payment of such tax would be excessive relative
to the failure involved.
‘‘(d) EMPLOYER REQUIRED TO MAKE COMPARABLE MSA CON-
TRIBUTIONS FOR ALL PARTICIPATING EMPLOYEES.—
‘‘(1) IN GENERAL.—An employer meets the requirements
of this subsection for any calendar year if the employer makes
available comparable contributions to the medical savings
accounts of all comparable participating employees for each
coverage period during such calendar year.
‘‘(2) COMPARABLE CONTRIBUTIONS.—
‘‘(A) IN GENERAL.—For purposes of paragraph (1), the
term ‘comparable contributions’ means contributions—
‘‘(i) which are the same amount, or
‘‘(ii) which are the same percentage of the annual
deductible limit under the high deductible health plan
covering the employees.
‘‘(B) PART-YEAR
EMPLOYEES.—In the case of an
employee who is employed by the employer for only a
portion of the calendar year, a contribution to the medical
savings account of such employee shall be treated as com-
parable if it is an amount which bears the same ratio
to the comparable amount (determined without regard to
this subparagraph) as such portion bears to the entire
calendar year.
‘‘(3) COMPARABLE PARTICIPATING EMPLOYEES.—For purposes
of paragraph (1), the term ‘comparable participating employees’
means all employees—
‘‘(A) who are eligible individuals covered under any
high deductible health plan of the employer, and
‘‘(B) who have the same category of coverage.
For purposes of subparagraph (B), the categories of coverage
are self-only and family coverage.
‘‘(4) PART-TIME EMPLOYEES.—
‘‘(A) IN GENERAL.—Paragraph (3) shall be applied sepa-
rately with respect to part-time employees and other
employees.
‘‘(B) PART-TIME EMPLOYEE.—For purposes of subpara-
graph (A), the term ‘part-time employee’ means any
employee who is customarily employed for fewer than 30
hours per week.
‘‘(e) CONTROLLED GROUPS.—For purposes of this section, all
persons treated as a single employer under subsection (b), (c),
(m), or (o) of section 414 shall be treated as 1 employer.
‘‘(f) DEFINITIONS.—Terms used in this section which are also
used in section 220 have the respective meanings given such terms
in section 220.’’.
(B) CLERICAL AMENDMENT.—The table of sections for
chapter 43 is amended by adding after the item relating
to section 4980D the following new item:
‘‘Sec. 4980E. Failure of employer to make comparable medical savings account con-
tributions.’’.
H. R. 3103—116
(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) TAX
ON EXCESS CONTRIBUTIONS.—Section 4973 (relating
to tax on excess contributions to individual retirement accounts,
certain section 403(b) contracts, and certain individual retirement
annuities) is amended—
(1) by inserting ‘‘MEDICAL
SAVINGS
ACCOUNTS,’’ after
‘‘ACCOUNTS,’’ in the heading of such section,
(2) by striking ‘‘or’’ at the end of paragraph (1) of sub-
section (a),
(3) by redesignating paragraph (2) of subsection (a) as
paragraph (3) and by inserting after paragraph (1) the follow-
ing:
‘‘(2) a medical savings account (within the meaning of sec-
tion 220(d)), or’’, and
(4) by adding at the end the following new subsection:
‘‘(d) EXCESS CONTRIBUTIONS TO MEDICAL SAVINGS ACCOUNTS.—
For purposes of this section, in the case of medical savings accounts
(within the meaning of section 220(d)), the term ‘excess contribu-
tions’ means the sum of—
‘‘(1) the aggregate amount contributed for the taxable year
to the accounts (other than rollover contributions described
in section 220(f)(5)) which is neither excludable from gross
income under section 106(b) nor allowable as a deduction under
section 220 for such year, and
‘‘(2) the amount determined under this subsection for the
preceding taxable year, reduced by the sum of—
‘‘(A) the distributions out of the accounts which were
included in gross income under section 220(f)(2), and
‘‘(B) the excess (if any) of—
‘‘(i) the maximum amount allowable as a deduction
under section 220(b)(1) (determined without regard to
section 106(b)) for the taxable year, over
‘‘(ii) the amount contributed to the accounts for
the taxable year.
For purposes of this subsection, any contribution which is distrib-
uted out of the medical savings account in a distribution to which
section 220(f)(3) applies shall be treated as an amount not contrib-
uted.’’.
(f) 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 ACCOUNTS.—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 otherwise be tax-
able under this section) if, with respect to such transaction,
the account ceases to be a medical savings account by reason
of the application of section 220(e)(2) to such account.’’.
(2) Paragraph (1) of section 4975(e) is amended to read
as follows:
‘‘(1) PLAN.—For purposes of this section, the term ‘plan’
means—
H. R. 3103—117
‘‘(A) a trust described in section 401(a) which forms
a part of a plan, or a plan described in section 403(a),
which trust or plan is exempt from tax under section 501(a),
‘‘(B) an individual retirement account described in sec-
tion 408(a),
‘‘(C) an individual retirement annuity described in sec-
tion 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 subparagraph of this paragraph.’’.
(g) 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.
‘‘(2) PROVISIONS.—The provisions referred to in this para-
graph are—
‘‘(A) subsections (i) and (l) of section 408 (relating
to individual retirement plans), and
‘‘(B) section 220(h) (relating to medical savings
accounts).’’.
(h) EXCEPTION FROM CAPITALIZATION OF POLICY ACQUISITION
EXPENSES.—Subparagraph (B) of section 848(e)(1) (defining speci-
fied 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)).’’.
(i) CLERICAL AMENDMENT.—The table of sections for part VII
of subchapter B of chapter 1 is amended by striking the last
item and inserting the following:
‘‘Sec. 220. Medical savings accounts.
‘‘Sec. 221. Cross reference.’’.
(j) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1996.
(k) MONITORING
OF
PARTICIPATION
IN
MEDICAL
SAVINGS
ACCOUNTS.—The Secretary of the Treasury or his delegate shall—
(1) during 1997, 1998, 1999, and 2000, regularly evaluate
the number of individuals who are maintaining medical savings
accounts and the reduction in revenues to the United States
by reason of such accounts, and
(2) provide such reports of such evaluations to Congress
as such Secretary determines appropriate.
(l) STUDY
OF EFFECTS
OF MEDICAL SAVINGS ACCOUNTS
ON
SMALL GROUP MARKET.—The Comptroller General of the United
States shall enter into a contract with an organization with exper-
tise in health economics, health insurance markets, and actuarial
H. R. 3103—118
science to conduct a comprehensive study regarding the effects
of medical savings accounts in the small group market on—
(1) selection, including adverse selection,
(2) health costs, including any impact on premiums of
individuals with comprehensive coverage,
(3) use of preventive care,
(4) consumer choice,
(5) the scope of coverage of high deductible plans purchased
in conjunction with such accounts, and
(6) other relevant items.
A report on the results of the study conducted under this subsection
shall be submitted to the Congress no later than January 1, 1999.
Subtitle 
B—Increase 
in 
Deduction 
for
Health Insurance Costs of Self-Employed
Individuals
SEC. 311. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS
OF SELF-EMPLOYED INDIVIDUALS.
(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 individual 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 con-
stitutes medical care for the taxpayer, his spouse, and
dependents.
‘‘(B) 
APPLICABLE
PERCENTAGE.—For 
purposes 
of
subparagraph (A), the applicable percentage shall be deter-
mined under the following table:
‘‘For taxable years beginning 
in calendar year—
The applicable percentage is—
1997 ............................................................................
40 percent
1998 through 2002 ....................................................
45 percent
2003 ............................................................................
50 percent
2004 ............................................................................
60 percent
2005 ............................................................................
70 percent
2006 or thereafter .....................................................
80 percent.’’.
(b) EXCLUSION FOR AMOUNTS RECEIVED UNDER CERTAIN SELF-
INSURED PLANS.—Paragraph (3) of section 104(a) is amended by
inserting ‘‘(or through an arrangement having the effect of accident
or health insurance)’’ after ‘‘health insurance’’.
(c) EFFECTIVE DATE.—The amendments made by this section
shall apply to taxable years beginning after December 31, 1996.
H. R. 3103—119
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 definitions) is
amended by inserting after section 7702A the following new section:
‘‘SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSUR-
ANCE.
‘‘(a) IN GENERAL.—For purposes of this title—
‘‘(1) a qualified long-term care insurance contract shall
be treated as an accident and health insurance contract,
‘‘(2) amounts (other than policyholder dividends, as defined
in section 808, or premium refunds) received under a qualified
long-term care insurance contract shall be treated as amounts
received for personal injuries and sickness and shall be treated
as reimbursement for expenses actually incurred for medical
care (as defined in section 213(d)),
‘‘(3) any plan of an employer providing coverage 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 insurance 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 contract shall
be treated as a guaranteed renewable contract 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 insur-
ance contract’ means any insurance contract if—
‘‘(A) the only insurance protection provided under such
contract is coverage of qualified long-term care services,
‘‘(B) such contract does not pay or reimburse expenses
incurred for services or items to the extent that such
expenses are reimbursable under title XVIII of the Social
Security Act or would be so reimbursable but for the
application of a deductible or coinsurance amount,
‘‘(C) such contract is guaranteed renewable,
‘‘(D) such contract does not provide for a cash surrender
value or other money that can be—
‘‘(i) paid, assigned, or pledged as collateral for a
loan, or
‘‘(ii) borrowed,
other than as provided in subparagraph (E) or paragraph
(2)(C),
‘‘(E) all refunds of premiums, and all policyholder divi-
dends or similar amounts, under such contract are to be
applied as a reduction in future premiums or to increase
future benefits, and
‘‘(F) such contract meets the requirements of subsection
(g).
H. R. 3103—120
‘‘(2) SPECIAL RULES.—
‘‘(A) PER DIEM, ETC. PAYMENTS PERMITTED.—A contract
shall not fail to be described in subparagraph (A) or (B)
of paragraph (1) by reason of payments being made on
a per diem or other periodic basis without regard to the
expenses incurred during the period to which the payments
relate.
‘‘(B) SPECIAL RULES RELATING TO MEDICARE.—
‘‘(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 construed or
applied so as to prohibit the offering of a qualified
long-term care insurance contract on the basis that
the contract coordinates its benefits with those pro-
vided 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 surrender or cancellation of the contract,
which cannot exceed the aggregate premiums paid under
the contract. Any refund on a complete surrender or can-
cellation of the contract shall be includible in gross income
to the extent that any deduction or exclusion was allowable
with respect to the premiums.
‘‘(c) QUALIFIED LONG-TERM CARE SERVICES.—For purposes of
this section—
‘‘(1) IN
GENERAL.—The term ‘qualified long-term care
services’ means necessary diagnostic, preventive, therapeutic,
curing, treating, mitigating, and rehabilitative services, and
maintenance or personal care services, which—
‘‘(A) are required by a chronically ill individual, and
‘‘(B) are provided pursuant to a plan of care prescribed
by a licensed health care practitioner.
‘‘(2) CHRONICALLY ILL INDIVIDUAL.—
‘‘(A) IN GENERAL.—The term ‘chronically ill individual’
means any individual who has been certified by a licensed
health care practitioner as—
‘‘(i) being unable to perform (without substantial
assistance from another individual) 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 similar (as deter-
mined under regulations prescribed by the Secretary
in consultation with the Secretary of Health and
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 otherwise meet-
ing the requirements of the preceding sentence unless
within the preceding 12-month period a licensed health
care practitioner has certified that such individual meets
such requirements.
‘‘(B) ACTIVITIES
OF
DAILY
LIVING.—For purposes of
subparagraph (A), each of the following is an activity of
daily living:
H. R. 3103—121
‘‘(i) Eating.
‘‘(ii) Toileting.
‘‘(iii) Transferring.
‘‘(iv) Bathing.
‘‘(v) Dressing.
‘‘(vi) Continence.
A contract shall not be treated as a qualified long-term
care insurance contract unless the determination of
whether an individual is a chronically ill individual takes
into account at least 5 of such activities.
‘‘(3) MAINTENANCE OR PERSONAL CARE SERVICES.—The term
‘maintenance or personal care services’ 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 cognitive impair-
ment).
‘‘(4) LICENSED
HEALTH
CARE
PRACTITIONER.—The term
‘licensed health care practitioner’ means any physician (as
defined in section 1861(r)(1) of the Social Security Act) and
any registered professional nurse, licensed social worker, or
other individual who meets such requirements as may be pre-
scribed by the Secretary.
‘‘(d) AGGREGATE PAYMENTS IN EXCESS OF LIMITS.—
‘‘(1) IN GENERAL.—If the aggregate of—
‘‘(A) the periodic payments received for any period
under all qualified long-term care insurance contracts
which are treated as made for qualified long-term care
services for an insured, and
‘‘(B) the periodic payments received for such period
which are treated under section 101(g) as paid by reason
of the death of such insured,
exceeds the per diem limitation for such period, such excess
shall be includible in gross income without regard to section
72. A payment shall not be taken into account under subpara-
graph (B) if the insured is a terminally ill individual (as defined
in section 101(g)) at the time the payment is received.
‘‘(2) PER DIEM LIMITATION.—For purposes of paragraph (1),
the per diem limitation for any period is an amount equal
to the excess (if any) of—
‘‘(A) the greater of—
‘‘(i) the dollar amount in effect for such period
under paragraph (4), or
‘‘(ii) the costs incurred for qualified long-term care
services provided for the insured for such period, over
‘‘(B) the aggregate payments received as reimburse-
ments (through insurance or otherwise) for qualified long-
term care services provided for the insured during such
period.
‘‘(3) AGGREGATION
RULES.—For purposes of this sub-
section—
‘‘(A) all persons receiving periodic payments described
in paragraph (1) with respect to the same insured shall
be treated as 1 person, and
‘‘(B) the per diem limitation determined under para-
graph (2) shall be allocated first to the insured and any
remaining limitation shall be allocated among the other
H. R. 3103—122
such persons in such manner as the Secretary shall pre-
scribe.
‘‘(4) 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).
‘‘(5) INFLATION ADJUSTMENT.—In the case of a calendar
year after 1997, the dollar amount contained in paragraph
(4) shall be increased at the same time and in the same manner
as amounts are increased pursuant to section 213(d)(10).
‘‘(6) PERIODIC PAYMENTS.—For purposes of this subsection,
the term ‘periodic payment’ means any payment (whether on
a periodic basis or otherwise) made without regard to the
extent of the costs incurred by the payee for qualified long-
term care services.
‘‘(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—
‘‘(1) IN GENERAL.—This section shall apply as if the portion
of the contract providing such coverage is a separate contract.
‘‘(2) APPLICATION OF 7702.—Section 7702(c)(2) (relating to
the guideline premium limitation) shall be applied by increasing
the guideline premium limitation with respect to a life insur-
ance contract, as of any date—
‘‘(A) by the sum of any charges (but not premium
payments) against the life insurance contract’s cash surren-
der value (within the meaning of section 7702(f)(2)(A)) for
such coverage made to that date under the contract, less
‘‘(B) any such charges the imposition of which reduces
the premiums paid for the contract (within the meaning
of section 7702(f)(1)).
‘‘(3) APPLICATION OF SECTION 213.—No deduction shall be
allowed under section 213(a) for charges against the life insur-
ance 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).
‘‘(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 contract without regard to long-term
care insurance coverage.
‘‘(f) TREATMENT OF CERTAIN STATE-MAINTAINED PLANS.—
‘‘(1) IN GENERAL.—If—
‘‘(A) an individual receives coverage for qualified long-
term care services under a State long-term care plan, and
‘‘(B) the terms of such plan would satisfy the require-
ments of subsection (b) were such plan an insurance con-
tract,
such plan shall be treated as a qualified long-term care insur-
ance contract for purposes of this title.
‘‘(2) STATE LONG-TERM CARE PLAN.—For purposes of para-
graph (1), the term ‘State long-term care plan’ means any
plan—
‘‘(A) which is established and maintained by a State
or an instrumentality of a State,
H. R. 3103—123
‘‘(B) which provides coverage only for qualified long-
term care services, and
‘‘(C) under which such coverage is provided only to—
‘‘(i) employees and former employees of a State
(or any political subdivision or instrumentality of a
State),
‘‘(ii) the spouses of such employees, and
‘‘(iii) individuals bearing a relationship to such
employees or spouses which is described in any of
paragraphs (1) through (8) of section 152(a).’’.
(b) RESERVE METHOD.—Clause (iii) of section 807(d)(3)(A) is
amended by inserting ‘‘(other than a qualified long-term care insur-
ance contract, as defined in section 7702B(b))’’ after ‘‘insurance
contract’’.
(c) LONG-TERM CARE INSURANCE NOT PERMITTED UNDER CAFE-
TERIA PLANS OR FLEXIBLE SPENDING ARRANGEMENTS.—
(1) CAFETERIA PLANS.—Section 125(f) is amended by adding
at the end the following new sentence: ‘‘Such term shall not
include any product which is advertised, marketed, or offered
as long-term care insurance.’’.
(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 following new subsection:
‘‘(c) INCLUSION
OF
LONG-TERM
CARE
BENEFITS
PROVIDED
THROUGH FLEXIBLE SPENDING ARRANGEMENTS.—
‘‘(1) IN GENERAL.—Effective on and after January 1, 1997,
gross income of an employee shall include employer-provided
coverage for qualified long-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 maximums and other reasonable
conditions), and
‘‘(B) the maximum amount of reimbursement which
is reasonably available to a participant for such coverage
is less than 500 percent of the value of such coverage.
In the case of an insured plan, the maximum amount reason-
ably available shall be determined on the basis of the underly-
ing coverage.’’
(d) CONTINUATION COVERAGE RULES NOT TO APPLY.—
(1) Paragraph (2) of section 4980B(g) is amended by adding
at the end the following new sentence: ‘‘Such term shall not
include any plan substantially all of the coverage under which
is for qualified long-term care services (as defined in section
7702B(c)).’’
(2) Paragraph (1) of section 607 of the Employee Retirement
Income Security Act of 1974 is amended by adding at the
end the following new sentence: ‘‘Such term shall not include
any plan substantially all of the coverage under which is for
qualified long-term care services (as defined in section 7702B(c)
of such Code).’’