‘‘(d) HEALTH SAVINGS ACCOUNT.—For purposes of 
this section—
‘‘(1) IN GENERAL.—The term ‘health savings ac-
count’ means a trust created or organized in the 
United States as a health savings account exclusively 
for the purpose of paying the qualified medical ex-
penses of the account beneficiary, but only if the writ-
ten governing instrument creating the trust meets the 
following requirements: 
‘‘(A) Except in the case of a rollover con-
tribution from an Archer MSA, or a health sav-
ings account, which is not includible in gross in-
come, no contribution will be accepted— 
‘‘(i) unless it is in cash and is contrib-
uted by—
‘‘(I) the account beneficiary, 
‘‘(II) a member of the family of 
the account beneficiary, or 
‘‘(III) an employer of the account 
beneficiary, and 
‘‘(ii) to the extent such contribution, 
when added to previous contributions to the 
trust for the calendar year, exceeds the dol-
lar amount in subsection (b)(2)(B) in-
creased by the additional contribution
amount for taxable years beginning in such 
calendar year. 
‘‘(B) The trustee is a bank (as defined in 
section 408(n)), an insurance company (as de-
fined in section 816), or another person who 
demonstrates to the satisfaction of the Secretary 
that the manner in which such person will ad-
minister the trust will be consistent with the re-
quirements 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 com-
mingled 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) MEMBER OF THE FAMILY.—The term ‘mem-
ber of the family’ has the meaning given such term 
in section 2032A(e)(2). 
‘‘(3) QUALIFIED MEDICAL EXPENSES.—The term 
‘qualified medical expenses’ has the meaning given 
such term in section 220(d)(2), except that—
‘‘(A) subparagraph (B)(i) thereof shall not 
apply to—
‘‘(i) insurance which constitutes a 
minimum deductible plan if no portion of 
the cost of such insurance is paid by an em-
ployer or former employer of the account 
beneficiary or the spouse of such bene-
ficiary, and 
‘‘(ii) any health insurance (other than 
health insurance substantially all of its cov-
erage is coverage described in subsection 
(c)(1)(B)) if the account beneficiary has at-
tained age 65, and 
‘‘(B) subparagraph (C) thereof shall not 
apply for purposes of this section. 
‘‘(4) ACCOUNT BENEFICIARY.—The term ‘account 
beneficiary’ means the individual on whose behalf the 
health savings account was established. 
‘‘(5) 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). 
‘‘(B) Section 219(f)(3) (relating to time 
when contributions deemed made).
‘‘(C) Except as provided in section 106(d), 
section 219(f)(5) (relating to employer pay-
ments). 
‘‘(D) Section 408(g) (relating to community 
property laws). 
‘‘(E) Section 408(h) (relating to custodial 
accounts). 
‘‘(6) CONTRIBUTIONS FROM FLEXIBLE SPENDING 
ACCOUNTS TREATED AS MADE BY THE EMPLOYER.—
Any contribution from a flexible spending account to 
a health savings account which is not includible in 
the gross income of the employee by reason of section
125(h) shall be treated as a contribution made by the 
employer for purposes of this section. 
‘‘(e) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) IN GENERAL.—A health savings account is 
exempt from taxation under this subtitle unless such 
account has ceased to be a health savings account. 
Notwithstanding the preceding sentence, any such ac-
count 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 health savings accounts, and any
amount treated as distributed under such similar 
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 health savings account which is used exclusively to 
pay qualified medical expenses of any account bene-
ficiary shall not be includible in gross income. 
‘‘(2) INCLUSION
OF
AMOUNTS
NOT
USED
FOR 
QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN GENERAL.—Any amount paid or 
distributed out of a health savings account which 
is not used exclusively to pay the qualified med-
ical expenses of the account beneficiary shall be 
included in the gross income of such beneficiary 
in the manner provided under section 72. 
‘‘(B) SPECIAL RULES FOR APPLYING SEC-
TION 72.—For purposes of applying section 72 to 
any amount described in subparagraph (A)—
‘‘(i) all health savings accounts shall be 
treated as 1 contract, 
‘‘(ii) all distributions during any tax-
able year shall be treated as 1 distribution,
‘‘(iii) the value of the contract, income 
on the contract, and investment in the con-
tract shall be computed as of the close of the 
calendar year in which the taxable year be-
gins, and 
‘‘(iv) such distributions shall be treated 
as made from contributions from members 
of the family of the account beneficiary to 
the extent that such distribution, when 
added to all previous distributions from the 
health savings account taken into account 
under this clause, do not exceed the aggre-
gate contributions from members of such 
family. 
‘‘(3) EXCESS
CONTRIBUTIONS
RETURNED
BE-
FORE DUE DATE OF RETURN.— 
‘‘(A) IN GENERAL.—If any excess contribu-
tion is contributed for a taxable year to any 
health savings account of an individual, para-
graph (2) shall not apply to distributions from 
the health savings accounts of such individual 
(to the extent such distributions do not exceed the 
aggregate excess contributions to all such ac-
counts of such individual for such year) if—
‘‘(i) such distribution is made on or 
before the last day prescribed by law (in-
cluding extensions of time) for filing the ac-
count beneficiary’s return for such taxable 
year, 
‘‘(ii) no deduction is allowed under 
this section with respect to such contribu-
tion, 
‘‘(iii) such distribution is accompanied 
by the amount of net income attributable to 
such excess contribution, and 
‘‘(iv) such distribution satisfies the re-
quirements of subparagraph (B). 
‘‘(B) RULES RELATED TO ORDERING.—
‘‘(i) DISTRIBUTIONS LIMITED TO CON-
TRIBUTIONS.—Subparagraph 
(A) 
shall 
apply to distributions to a person only to 
the extent of the contributions of such per-
son to such accounts during such taxable 
year. 
‘‘(ii) CLASSES
OF
CONTRIBUTORS.—
Subparagraph (A) shall apply only to dis-
tributions of such contributions which are 
made in the following order:
‘‘(I) first, to members of the fam-
ily of the account beneficiary, 
‘‘(II) second, to the account bene-
ficiary, 
‘‘(III) third, to employers of the 
account beneficiary with respect to 
contributions under section 125(h), 
and 
‘‘(IV) fourth, to employers of the 
account beneficiary with respect to 
contributions under section 106(d). 
‘‘(iii) LAST-IN
FIRST-OUT.—If dis-
tributions could be made to more than one 
person under any subclause of clause (ii),
subparagraph (A) shall not apply to any 
such distribution unless such distribution is 
of the most recent excess contribution which 
has not been distributed to the contributor. 
‘‘(C) TREATMENT
OF
NET
INCOME.—Any 
net income described in subparagraph (A)(iii) 
shall be included in the gross income of the per-
son receiving the distribution for the taxable 
year in which received. 
‘‘(D) EXCESS
CONTRIBUTION.—For pur-
poses of subparagraph (A), the term ‘excess con-
tribution’ means any contribution (other than a 
rollover contribution from another health savings 
account, or from an Archer MSA, which is not 
includible in gross income) to the extent such 
contribution results in the aggregate contribu-
tions to health savings accounts of the account 
beneficiary for the taxable year to be in excess of 
the limitation under subsection (b) (determined 
without regard to paragraph (5) thereof) which 
applies to such beneficiary for such year. 
‘‘(4) ADDITIONAL TAX ON DISTRIBUTIONS NOT 
USED FOR QUALIFIED MEDICAL EXPENSES.— 
‘‘(A) IN
GENERAL.—The tax imposed by 
this chapter on the account beneficiary for any 
taxable year in which there is a payment or dis-
tribution from a health savings account of such 
beneficiary 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.—Subparagraph (A) shall not apply if 
the payment or distribution is made after the ac-
count beneficiary 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 payment or distribu-
tion after the date on which the account bene-
ficiary attains the age specified in section 1811 
of the Social Security Act. 
‘‘(5) SPECIAL RULES.—Rules similar to the rules 
of paragraphs (5), (6), (7), and (8) of section 220(f) 
shall apply for purposes of this section. 
‘‘(g) REPORTS.—The Secretary may require the trustee 
of a health savings account to make such reports regarding 
such account to the Secretary and to the account beneficiary 
with respect to contributions, distributions, and such other 
matters as the Secretary determines appropriate. The re-
ports 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 the 
Secretary. 
‘‘(h) REGULATIONS.—The Secretary may issue regula-
tions to carry out the purposes of this section, including 
regulations regarding the proper treatment of distributions 
described in subsection (f)(3) and nondeductible contribu-
tions by members of the family of the account beneficiary.’’. 
(b) DEDUCTION ALLOWED WHETHER OR NOT INDI-
VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a) of
‘‘(A) the limitation under section 223(b) 
(determined without regard to this subsection) 
which is applicable to such employee for such 
taxable year, over 
‘‘(B) the aggregate amount treated as em-
ployer-provided coverage for medical expenses 
under an accident or health plan under sub-
section (b). 
‘‘(2) SPECIAL RULES.—Rules similar to the rules 
of paragraphs (2), (3), (4), and (5) of subsection (b) 
shall apply for purposes of this subsection. 
‘‘(3) DEFINITIONS.—For purposes of this sub-
section, the terms ‘eligible individual’ and ‘health sav-
ings account’ have the respective meanings given to 
such terms by section 223.
‘‘(4) CROSS REFERENCE.—
‘‘For penalty on failure by employer to make com-
parable contributions to the health savings accounts 
of comparable employees, see section 4980G.’’.
(2) EXCLUSION FROM EMPLOYMENT TAXES.—
(A) RAILROAD
RETIREMENT
TAX.—Sub-
section (e) of section 3231 of such Code is 
amended by adding at the end the following new 
paragraph: 
‘‘(11) HEALTH
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 reasonable 
to believe that the employee will be able to exclude 
such payment from income under section 106(d).’’. 
(B) UNEMPLOYMENT TAX.—Subsection (b) 
of section 3306 of such Code is amended by strik-
ing ‘‘or’’ at the end of paragraph (16), by strik-
ing the period at the end of paragraph (17) and 
inserting ‘‘; or’’, and by inserting after para-
graph (17) the following new paragraph: 
‘‘(18) any payment made to or for the benefit of 
an employee if at the time of such payment it is rea-
sonable to believe that the employee will be able to ex-
clude such payment from income under section 
106(d).’’. 
(C) WITHHOLDING TAX.—Subsection (a) of 
section 3401 of such Code is amended by striking 
‘‘or’’ at the end of paragraph (20), by striking 
the period at the end of paragraph (21) and in-
serting ‘‘; or’’, and by inserting after paragraph 
(21) the following new paragraph: 
‘‘(22) any payment made to or for the benefit of 
an employee if at the time of such payment it is rea-
sonable to believe that the employee will be able to ex-
clude such payment from income under section 
106(d).’’.
(3) EMPLOYER CONTRIBUTIONS REQUIRED TO BE 
SHOWN ON W–2.—Subsection (a) of section 6051 of 
such Code is amended by striking ‘‘and’’ at the end 
of paragraph (10), by striking the period at the end 
of paragraph (11) and inserting ‘‘, and’’, and by in-
serting after paragraph (11) the following new para-
graph: 
‘‘(12) the amount contributed to any health sav-
ings account (as defined in section 223(d)) of such 
employee or such employee’s spouse.’’. 
(4) PENALTY
FOR
FAILURE
OF
EMPLOYER
TO 
MAKE COMPARABLE HEALTH SAVINGS ACCOUNT CON-
TRIBUTIONS.—
(A) IN GENERAL.—Chapter 43 of such Code 
is amended by adding after section 4980F the 
following new section: 
‘‘SEC. 4980G. FAILURE OF EMPLOYER TO MAKE COM-
PARABLE HEALTH SAVINGS ACCOUNT CON-
TRIBUTIONS. 
‘‘(a) GENERAL RULE.—In the case of an employer who 
makes a contribution to the health savings account of any 
employee with respect to coverage under a minimum de-
ductible 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 im-
posed by subsection (a) on any failure for any calendar 
year is the amount equal to 35 percent of the aggregate 
amount contributed by the employer to health savings ac-
counts of employees for taxable years of such employees end-
ing 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 
HEALTH SAVINGS ACCOUNT CONTRIBUTIONS FOR ALL PAR-
TICIPATING EMPLOYEES.—An employer meets the require-
ments of this subsection for any calendar year if the em-
ployer meets the requirements of section 4980E(d) applied 
by—
‘‘(1) substituting ‘health savings account’ for ‘Ar-
cher MSA’ each place it appears, and 
‘‘(2) not taking into account any contribution 
made under section 125. 
‘‘(e) CONTROLLED GROUPS.—For purposes of this sec-
tion, all persons treated as a single employer under sub-
section (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 223 have the respective meanings 
given such terms in section 223.’’. 
(B) CLERICAL AMENDMENT.—The table of 
sections for chapter 43 of such Code is amended 
by adding after the item relating to section 
4980F the following new item:
‘‘Sec. 4980G. Failure of employer to make comparable health savings account 
contributions.’’.
(e) TAX ON EXCESS CONTRIBUTIONS.—Section 4973 
of such Code (relating to tax on excess contributions to cer-
tain tax-favored accounts and annuities) is amended—
(1) by striking ‘‘or’’ at the end of paragraph (3) 
of subsection (a), 
(2) by inserting ‘‘or’’ at the end of paragraph (4) 
of subsection (a), 
(3) by inserting after paragraph (4) of sub-
section (a) the following new paragraph: 
‘‘(5) a health savings account (within the mean-
ing of section 223(d)),’’, and 
(4) by adding at the end the following new sub-
section: 
‘‘(g) EXCESS CONTRIBUTIONS TO HEALTH SAVINGS 
ACCOUNTS.—For purposes of this section, in the case of
health savings accounts (within the meaning of section 
223(d)), the term ‘excess contributions’ means the sum of—
‘‘(1) the aggregate amount contributed for the 
taxable year to the accounts (other than a rollover 
contribution from another health savings account, or 
from an Archer MSA, which is not includible in gross 
income) which is in excess of the limitation under sec-
tion 223(b) (determined without regard to paragraph 
(5) thereof), and 
‘‘(2) the amount determined under this sub-
section for the preceding taxable year, reduced by the 
sum of—
‘‘(A) the distributions out of the accounts 
which were included in gross income under sec-
tion 223(f)(2), and 
‘‘(B) the excess (if any) of—
‘‘(i) the sum of limitations described in 
paragraph (1), over 
‘‘(ii) the amount contributed to the ac-
counts for the taxable year. 
For purposes of this subsection, any contribution which is 
distributed out of the health savings account in a distribu-
tion to which section 223(f)(3) applies shall be treated as 
an amount not contributed.’’. 
(f) TAX ON PROHIBITED TRANSACTIONS.—
(1) Section 4975 of such Code (relating to tax on 
prohibited transactions) is amended by adding at the 
end of subsection (c) the following new paragraph: 
‘‘(6) SPECIAL RULE FOR HEALTH SAVINGS AC-
COUNTS.—An individual for whose benefit a health 
savings account (within the meaning of section 
223(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 health 
savings account by reason of the application of sec-
tion 223(e)(2) to such account.’’. 
(2) Paragraph (1) of section 4975(e) of such 
Code is amended by redesignating subparagraphs (E) 
and (F) as subparagraphs (F) and (G), respectively, 
and by inserting after subparagraph (D) the following 
new subparagraph: 
‘‘(E) a health savings account described in 
section 223(d),’’. 
(g) FAILURE TO PROVIDE REPORTS ON HEALTH SAV-
INGS ACCOUNTS.—Paragraph (2) of section 6693(a) of such 
Code (relating to reports) is amended by redesignating sub-
paragraphs (C) and (D) as subparagraphs (D) and (E),
106(c)) that is a qualified benefit and only permits 
reimbursement for expenses for medical care (as de-
fined in section 213(d)(1) (without regard to subpara-
graphs (C) and (D) thereof). 
‘‘(4) UNUSED HEALTH BENEFITS.—For purposes 
of this subsection, with respect to an employee, the 
term ‘unused health benefits’ means the excess of—
‘‘(A) the maximum amount of reimburse-
ment allowable to the employee during a plan 
year under a health flexible spending arrange-
ment, taking into account any election by the 
employee, over 
‘‘(B) the actual amount of reimbursement 
during such year under such arrangement.’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 2003. 
SEC. 4. EXCEPTION TO INFORMATION REPORTING RE-
QUIREMENTS RELATED TO CERTAIN HEALTH 
ARRANGEMENTS. 
(a) IN GENERAL.—Section 6041 (relating to informa-
tion at source) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(f) SECTION DOES NOT APPLY TO CERTAIN HEALTH 
ARRANGEMENTS.—This section shall not apply to any pay-
ment for medical care (as defined in section 213(d)) made 
under—
‘‘(1) a flexible spending arrangement (as defined 
in section 106(c)(2)), or 
‘‘(2) a health reimbursement arrangement which 
is treated as employer-provided coverage under an ac-
cident or health plan for purposes of section 106.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to payments made after December 31, 
2002.
Union Calendar No. 89
108TH CONGRESS 
1ST SESSION 
H. R. 2351
[Report No. 108–177] 
A BILL 
To amend the Internal Revenue Code of 1986 to 
allow a deduction to individuals for amounts con-
tributed to health savings accounts and to pro-
vide for the disposition of unused health benefits 
in cafeteria plans and flexible spending arrange-
ments. 
JUNE 25, 2003
Reported with an amendment, committed to the Com-
mittee of the Whole House on the State of the Union, 
and ordered to be printed