TITLE I—AMENDMENTS OF IN-
TERNAL REVENUE CODE OF
1986
Subtitle A—Tax Incentives for
Purchase of Health Care Coverage
SEC. 
101. 
REFUNDABLE 
CREDIT 
FOR 
PURCHASE 
OF
HEALTH CARE COVERAGE.
(a) ALLOWANCE OF CREDIT.—Subpart C of part IV
of subchapter A of chapter 1 of the Internal Revenue Code
of 1986 (relating to refundable credits) is amended by re-
designating section 35 as section 36 and by inserting after
section 34 the following new section:
‘‘SEC. 35. PURCHASE OF HEALTH CARE COVERAGE.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax
imposed by this subtitle for the taxable year an amount
equal to 30 percent of the sum of—
‘‘(1) the amount paid by the taxpayer during
the taxable year for health care coverage for the tax-
payer, the spouse of the taxpayer, and any depend-
ent (as defined in section 152) of the taxpayer, and
‘‘(2) if the individual is an eligible individual,
the amount contributed by the taxpayer for the tax-
able year to a medical care savings account of such
individual.
‘‘(b) LIMITATION ON CONTRIBUTIONS TO MEDICAL
CARE SAVINGS ACCOUNTS.—
‘‘(1) IN GENERAL.—The amount taken into ac-
count under subsection (a)(2) for any taxable year
for contributions to a medical care savings account
of an individual shall not exceed the amount of pa-
tient cost-sharing required under the high deductible
health plan or the health maintenance organization
covering the individual. In the case of a husband
and wife, the excess described in the preceding sen-
tence shall be divided equally between such spouses.
‘‘(2) PRORATION OF LIMITATION IF PART-YEAR
ELIGIBILITY.—In the case of an individual who is an
eligible individual only for a portion (but not all) of
the calendar year ending with or within the taxable
year, the limitation under this subsection for such
taxable year shall be an amount which bears the
same ratio to such limitation (determined without
regard to this paragraph) as such portion bears to
the entire calendar year.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible
individual’ means any individual who is covered
under a high deductible health plan or by a health
maintenance organization. Such term shall not in-
clude an individual with respect to whom a deduc-
tion under section 151 is allowable to another tax-
payer for a taxable year beginning in the calendar
year in which the individual’s taxable year begins.
‘‘(2) HIGH DEDUCTIBLE HEALTH PLAN.—The
term ‘high deductible health plan’ means insurance
which constitutes medical care (as defined in section
213(d)), but only if such insurance requires patient
cost-sharing of at least $1,000 per year but not
more than $5,000 per year.
‘‘(3) HEALTH
CARE
COVERAGE.—The term
‘health care coverage’ means—
‘‘(A) coverage under insurance which con-
stitutes medical care (as defined in section
213(d)),
‘‘(B) coverage under an accident or health
plan, and
‘‘(C) coverage by a health maintenance or-
ganization.
Such term does not include excluded coverage.
‘‘(4) EXCLUDED
COVERAGE.—The term ‘ex-
cluded coverage’ means—
‘‘(A) any coverage providing wages or pay-
ments in lieu of wages for any period during
which the employee is absent from work on ac-
count of sickness or injury,
‘‘(B) any coverage providing for payments
referred to in section 105(c),
‘‘(C) any coverage provided to an employee
or former employee after such employee has at-
tained age 65, unless such coverage is provided
by reason of the current employment of the in-
dividual 
(within 
the 
meaning 
of 
section
1862(b)(1)(A)(i)(I) of the Social Security Act)
with the employer providing the coverage,
‘‘(D) any coverage provided under Federal
law to any individual (or spouse or dependent
thereof) by reason of such individual being—
‘‘(i) a member of the Armed Forces of
the United States, or
‘‘(ii) a veteran, and
‘‘(E) any other coverage to the extent that
the Secretary determines that the continuation
of an exclusion for such coverage is not incon-
sistent with the purposes of this section.’’
‘‘(d) SPECIAL RULES.—
‘‘(1) COORDINATION WITH MEDICAL EXPENSE
DEDUCTION.—Any amount which is taken into ac-
count in determining the credit under this section
shall not be taken into account under section 213.
‘‘(2) COORDINATION WITH FLEXIBLE SPENDING
ACCOUNTS.—Any amount paid from a flexible spend-
ing account shall be treated as not paid by the tax-
payer.’’
(b) REPEAL OF DEDUCTION OF HEALTH INSURANCE
COSTS FOR SELF-EMPLOYED INDIVIDUALS.—Subsection
(l) of section 162 is hereby repealed.
(c) TECHNICAL AMENDMENTS.—
(1) The table of sections for such subpart C is
amended by striking the last item and inserting the
following new items:
‘‘Sec. 35. Purchase of health care coverage.
‘‘Sec. 36. Overpayments of tax.’’
(2) Paragraph (2) of section 1324(b) of title
31, United States Code, is amended by inserting be-
fore the period ‘‘or from section 35 of such Code’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
Subtitle B—Medical Care Savings
Accounts
SEC. 111. MEDICAL CARE SAVINGS ACCOUNTS.
(a) IN GENERAL.—Subpart A of part I of subchapter
D of chapter 1 of the Internal Revenue Code of 1986 is
amended by inserting after section 408 the following new
section:
‘‘SEC. 408A. MEDICAL CARE SAVINGS ACCOUNTS.
‘‘(a) GENERAL RULE.—For purposes of this title, the
term ‘medical care savings account’ (which may also be
referred to as a ‘Medical IRA’) means a trust created or
organized in the United States for the exclusive benefit
of an individual and the individual’s spouse and depend-
ents (as defined in section 152), but only if the written
instrument creating the trust meets the following require-
ments:
‘‘(1) Except in the case of a rollover contribu-
tion described in subsection (c)(5), no contribution
will be accepted unless it is in cash and contribu-
tions will not be accepted during any calendar year
in excess of the limitation applicable to the individ-
ual under section 35(b)(2).
‘‘(2) The trustee is a bank (as defined in sec-
tion 408(n)), insurance company (as defined in sec-
tion 816), or such other person who demonstrates to
the satisfaction of the Secretary that the manner in
which such other person will administer the trust
will be consistent with the requirements of this
section.
‘‘(3) No part of the trust funds will be invested
in life insurance contracts.
‘‘(4) The interest of an individual in the bal-
ance of the account is nonforfeitable.
‘‘(5) The assets of the trust will not be commin-
gled with other property except in a common trust
fund or common investment fund.
‘‘(b) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) ACCOUNT TAXED AS GRANTOR TRUST.—
The account beneficiary of a medical care savings
account shall be treated for purposes of this title as
the owner thereof and shall be subject to tax thereon
in accordance with subpart E of part I of subchapter
J of this chapter (relating to grantors and others
treated as substantial owners).
‘‘(2) ACCOUNT TERMINATES IF INDIVIDUAL EN-
GAGES IN PROHIBITED TRANSACTION.—
‘‘(A) IN GENERAL.—If, during any taxable
year of the account beneficiary, such beneficiary
engages in any transaction prohibited by section
4975 with respect to the account, the account
ceases to be a medical care savings account as
of the first day of that taxable year.
‘‘(B) ACCOUNT TREATED AS DISTRIBUTING
ALL ITS ASSETS.—In any case in which any ac-
count ceases to be a medical care savings ac-
count by reason of subparagraph (A) on the
first day of any taxable year, subsection (c)
shall be applied as if—
‘‘(i) there were a distribution on such
first day in an amount equal to the fair
market value (on such first day) of all as-
sets in the account (on such first day), and
‘‘(ii) no portion of such distribution
were used to pay qualified expenses.
‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU-
RITY.—If, during any taxable year, the account ben-
eficiary uses the account or any portion thereof as
security for a loan, the portion so used is treated as
distributed and not used to pay qualified expenses.
‘‘(c) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Any amount paid or dis-
tributed out of a medical care savings account shall
be included in the gross income of the account bene-
ficiary unless such amount is used exclusively to pay
the qualified expenses of such beneficiary or of the
spouse and dependents (as defined in section 152) of
such beneficiary.
‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—Paragraph (1) shall
not apply to the distribution of any contribution paid
during a taxable year to a medical care savings ac-
count to the extent that such contribution exceeds
the limitation applicable under section 35(b)(2) if—
‘‘(A) such distribution is received by the
individual on or before the last day prescribed
by law (including extensions of time) for filing
such individual’s return for such taxable year,
and
‘‘(B) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (B) shall
be included in the gross income of the individual for
the taxable year in which it is received.
‘‘(3) PENALTY FOR DISTRIBUTIONS NOT USED
FOR QUALIFIED EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by
this chapter for any taxable year in which there
is a payment or distribution from a medical
care savings account which is includible in gross
income under paragraph (1) shall be increased
by 10 percent of the amount which is so includ-
ible.
‘‘(B) 
EXCEPTION
FOR
DISTRIBUTIONS
AFTER AGE 591⁄2.—Subparagraph (A) shall not
apply to any distribution or payment after the
date on which the account beneficiary attains
age 591⁄2.
‘‘(C) DISABILITY OR DEATH CASES.—Sub-
paragraph (A) shall not apply if the payment or
distribution is made after the account bene-
ficiary becomes disabled within the meaning of
section 72(m)(7) or dies.
‘‘(4) ROLLOVER CONTRIBUTION.—An amount is
described in this paragraph as a rollover contribu-
tion if it meets the requirements of subparagraphs
(A) and (B).
‘‘(A) IN
GENERAL.—Paragraph (1) does
not apply to any amount paid or distributed out
of a medical care savings account to the ac-
count beneficiary if the entire amount received
is paid into a medical care savings account for
the benefit of such beneficiary not later than
the 60th day after the day on which he receives
the payment or distribution.
‘‘(B) LIMITATION.—This paragraph does
not apply to any amount described in subpara-
graph (A) received by an individual from a
medical care savings account if at any time dur-
ing the one-year period ending on the day of
such receipt such individual received any other
amount described in subparagraph (A) from a
medical care savings account which was not in-
cludible in his gross income because of the ap-
plication of this paragraph.
‘‘(C) DENIAL OF ROLLOVER TREATMENT
FOR INHERITED ACCOUNTS, ETC.—
‘‘(i) IN GENERAL.—In the case of an
inherited medical care savings account—
‘‘(I) this paragraph shall not
apply to any amount received by an
individual from such an account (and
no amount transferred from such ac-
count to another medical care savings
account shall be excluded from gross
income by reason of such transfer),
and
‘‘(II) such inherited account shall
not be treated as a medical care sav-
ings account for purposes of determin-
ing whether any other amount is a
rollover contribution.
‘‘(ii) INHERITED MEDICAL CARE SAV-
INGS
ACCOUNT.—A medical care savings
account shall be treated as inherited if—
‘‘(I) the account beneficiary ac-
quired such account by reason of the
death of another individual, and
‘‘(II) the account beneficiary was
not the surviving spouse of such other
individual.
‘‘(d) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED EXPENSES.—The term ‘quali-
fied expenses’ means any of the following expenses
which are incurred for the benefit of the account
beneficiary or the spouse or dependents (as defined
in section 152) of such beneficiary:
‘‘(A) Expenses for medical care (as defined
in section 213(d)).
‘‘(B) Expenses for long-term care services
(or premiums for long-term care insurance).
‘‘(C) Expenses for work-related training,
education, and child care.
‘‘(2) ACCOUNT
BENEFICIARY.—The term ‘ac-
count beneficiary’ means the individual for whose
benefit the medical care savings account is estab-
lished.
‘‘(e) CUSTODIAL ACCOUNTS.—For purposes of this
section, a custodial account shall be treated as a trust if—
‘‘(1) the assets of such account are held by a
bank (as defined in section 408(n)), insurance com-
pany (as defined in section 816), or another person
who demonstrates to the satisfaction of the Sec-
retary that the manner in which he will administer
the account will be consistent with the requirements
of this section, and
‘‘(2) the custodial account would, except for the
fact that it is not a trust, constitute a medical care
savings account described in subsection (a).
For purposes of this title, in the case of a custodial ac-
count treated as a trust by reason of the preceding sen-
tence, the custodian of such account shall be treated as
the trustee thereof.
‘‘(f) REPORTS.—The trustee of a medical care sav-
ings account shall make such reports regarding such ac-
count to the Secretary and to the account beneficiary with
respect to contributions, distributions, and such other
matters as the Secretary may require under regulations.
The reports required by this subsection shall be filed at
such time and in such manner and furnished to such indi-
viduals at such time and in such manner as may be re-
quired by those regulations.’’
(b) EMPLOYER PAYMENTS EXCLUDED FROM EM-
PLOYMENT TAX BASE.—
(1) SOCIAL SECURITY TAXES.—
(A) Subsection (a) of section 3121 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 inserting ‘‘; 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
reasonable to believe that the employee will be able
to exclude such payment from income under section
106.’’
(B) Subsection (a) of section 209 of the
Social Security Act is amended by striking ‘‘or’’
at the end of paragraph (18), by striking the
period at the end of paragraph (19) and insert-
ing ‘‘; or’’, and by inserting after paragraph
(19) the following new paragraph:
‘‘(20) 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 of the Internal Revenue Code of 1986.’’
(2) RAILROAD RETIREMENT TAX.—Subsection
(e) of section 3231 of such Code is amended by add-
ing at the end the following new paragraph:
‘‘(10) MEDICAL CARE SAVINGS ACCOUNT CON-
TRIBUTIONS.—The term ‘compensation’ shall not in-
clude any payment made to or for the benefit of an
employee if at the time of such payment it is reason-
able to believe that the employee will be able to ex-
clude such payment from income under section
106.’’
(3) UNEMPLOYMENT TAX.—Subsection (b) of
section 3306 of such Code 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 fol-
lowing 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.’’
(4) WITHHOLDING TAX.—Subsection (a) of sec-
tion 3401 of such Code 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.’’
(c) TAX ON EXCESS CONTRIBUTIONS.—Section 4973
of such Code (relating to tax on excess contributions to
individual retirement accounts, certain section 403(b) con-
tracts, and certain individual retirement annuities) is
amended—
(1) by inserting ‘‘MEDICAL CARE SAVINGS
ACCOUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading
of such section,
(2) by redesignating paragraph (2) of sub-
section (a) as paragraph (3) and by inserting after
paragraph (1) the following:
‘‘(2) a medical care savings account (within the
meaning of section 408A),’’,
(3) by striking ‘‘or’’ at the end of paragraph
(1) of subsection (a), and
(4) by adding at the end thereof the following
new subsection:
‘‘(d) EXCESS CONTRIBUTIONS TO MEDICAL CARE
SAVINGS ACCOUNTS.—For purposes of this section, in the
case of a medical care savings account (within the mean-
ing of section 408A), the term ‘excess contributions’
means the amount by which the amount contributed for
the taxable year to the account exceeds the limitation ap-
plicable under section 35(b)(2) for such taxable year. For
purposes of this subsection, any contribution which is dis-
tributed out of the medical care savings account in a dis-
tribution to which section 408A(c)(2) applies shall be
treated as an amount not contributed.’’
(d) TAX ON PROHIBITED TRANSACTIONS.—Section
4975 of such Code (relating to prohibited transactions)
is amended—
(1) by adding at the end of subsection (c) the
following new paragraph:
‘‘(4) SPECIAL RULE FOR MEDICAL CARE SAV-
INGS ACCOUNTS.—An individual for whose benefit a
medical care savings account (within the meaning of
section 408A) is established shall be exempt from
the tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if, with re-
spect to such transaction, the account ceases to be
a medical care savings account by reason of the ap-
plication of section 408A(b)(2)(A) to such account.’’,
and
(2) by inserting ‘‘or a medical care savings ac-
count described in section 408A’’ in subsection
(e)(1) after ‘‘described in section 408(a)’’.
(e) FAILURE TO PROVIDE REPORTS ON MEDICAL
CARE SAVINGS ACCOUNTS.—Section 6693 of such Code
(relating to failure to provide reports on individual retire-
ment account or annuities) is amended—
(1) by inserting ‘‘OR
ON
MEDICAL
CARE
SAVINGS ACCOUNTS’’ after ‘‘ANNUITIES’’ in the
heading of such section, and
(2) by adding at the end of subsection (a) the
following: ‘‘The person required by section 408A(f)
to file a report regarding a medical care savings ac-
count at the time and in the manner required by
such section shall pay a penalty of $50 for each fail-
ure unless it is shown that such failure is due to rea-
sonable cause.’’
(f) CLERICAL AMENDMENTS.—
(1) The table of sections for subpart A of part
I of subchapter D of chapter 1 of such Code is
amended by inserting after the item relating to sec-
tion 408 the following:
‘‘Sec. 408A. Medical care savings accounts.’’
(2) The table of sections for chapter 43 of such
Code is amended by striking the item relating to sec-
tion 4973 and inserting the following:
‘‘Sec. 4973. Tax on excess contributions to individual retirement
accounts, medical care savings accounts, certain
403(b) contracts, and certain individual retirement
annuities.’’
(3) The table of sections for subchapter B of
chapter 68 of such Code is amended by inserting ‘‘or
on medical care savings accounts’’ after ‘‘annuities’’
in the item relating to section 6693.
(g) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 1996.
SEC. 112. UNUSED AMOUNTS IN FLEXIBLE SPENDING AC-
COUNTS TRANSFERABLE TO MEDICAL CARE
SAVINGS ACCOUNTS.
(a) IN GENERAL.—Subsection (d) of section 125 of
the Internal Revenue Code of 1986 (relating to cafeteria
plans) is amended by adding at the end thereof the follow-
ing new paragraph:
‘‘(3) UNUSED
AMOUNTS
TRANSFERABLE
TO
MEDICAL CARE SAVINGS ACCOUNTS.—Subsection (a)
shall not fail to apply to a participant in a plan, and
a plan shall not fail to be treated as a cafeteria plan,
solely because under the plan amounts not paid out
as reimbursements under a flexible spending ar-
rangement for medical care (as defined in section
213(d)) for an individual or such individual’s spouse
and dependents) are contributed on the last day of
the plan year of the cafeteria plan to a medical care
savings account (as defined in section 408A) of such
individual.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to cafeteria plan years ending after
December 31, 1995.
Subtitle C—Expansion of COBRA
Continuation Coverage
SEC. 121. EXPANSION OF COBRA CONTINUATION COV-
ERAGE.
(a) AMENDMENTS TO INTERNAL REVENUE CODE.—
(1) SMALLER
EMPLOYERS
SUBJECT
TO
RE-
QUIREMENTS.—Paragraph (1) of section 4980B(d)
of the Internal Revenue Code of 1986 (relating to
tax not to apply to certain plans) is amended by
striking ‘‘20 employees’’ and inserting ‘‘4 employ-
ees’’.
(2) PERIOD OF COVERAGE EXTENDED TO 36
MONTHS.—
(A) IN
GENERAL.—Clause (i) of section
4980B(f)(2)(B) of such Code (relating to period
of coverage) is amended to read as follows:
‘‘(i) MAXIMUM REQUIRED PERIOD.—
‘‘(I) IN
GENERAL.—The date
which is 36 months after the date of
the qualifying event.
‘‘(II) SPECIAL
RULE
FOR
CER-
TAIN
BANKRUPTCY
PROCEEDINGS.—
In the case of a qualifying event de-
scribed in paragraph (3)(F) (relating
to bankruptcy proceedings), the date
of the death of the covered employee
or qualified beneficiary (described in
subsection (g)(1)(D)(iii)), or in the
case of the surviving spouse or de-
pendent children of the covered em-
ployee, 36 months after the date of
the death of the covered employee.
‘‘(III) QUALIFYING
EVENT
IN-
VOLVING MEDICARE ENTITLEMENT.—
In the case of an event described in
paragraph (3)(D) (without regard to
whether such event is a qualifying
event), the period of coverage for
qualified beneficiaries other than the
covered employee for such event or
any subsequent qualifying event shall
not terminate before the close of the
36-month period beginning on the
date the covered employee becomes
entitled to benefits under title XVIII
of the Social Security Act.’’
(B) TECHNICAL
AMENDMENT.—The last
sentence of section 4980B(f)(2)(C) of such
Code is amended to read as follows: ‘‘In the
case of a qualified beneficiary who is deter-
mined, under title II or XVI of the Social Secu-
rity Act, to have been disabled at the time of
a qualifying event described in paragraph
(3)(B), any reference in clause (i) to ‘102 per-
cent’ is deemed a reference to ‘150 percent’ for
any month after the 36th month of continu-
ation coverage.’’
(b) AMENDMENTS TO EMPLOYEE RETIREMENT IN-
COME SECURITY ACT OF 1974.—
(1) SMALLER
EMPLOYERS
SUBJECT
TO
RE-
QUIREMENTS.—Subsection (b) of section 601 of the
Employee Retirement Income Security Act of 1974
(29 U.S.C. 1161) (relating to exception for certain
plans) is amended by striking ‘‘20 employees’’ and
inserting ‘‘4 employees’’.
(2) PERIOD OF COVERAGE EXTENDED TO 36
MONTHS.—
covered employee for such event or any
subsequent qualifying event shall not ter-
minate before the close of the 36-month
period beginning on the date the covered
employee becomes entitled to benefits
under title XVIII of the Social Security
Act.’’
(B) TECHNICAL
AMENDMENT.—The last
sentence of section 602(3) of such Act is
amended to read as follows: ‘‘In the case of an
individual who is determined, under title II or
XVI of the Social Security Act, to have been
disabled at the time of a qualifying event de-
scribed in section 603(2), any reference in sub-
paragraph (A) to ‘102 percent’ is deemed a ref-
erence to ‘150 percent’ for any month after the
36th month of continuation coverage.’’
(c) AMENDMENTS
TO PUBLIC HEALTH SERVICE
ACT.—
(1) SMALLER
EMPLOYERS
SUBJECT
TO
RE-
QUIREMENTS.—Paragraph (1) of section 2201(b) of
the Public Health Service Act (42 U.S.C. 300bb-
1(b)) (relating to exception for certain plans) is
amended by striking ‘‘20 employees’’ and inserting
‘‘4 employees’’.
(2) PERIOD OF COVERAGE EXTENDED TO 36
MONTHS.—
(A) IN
GENERAL.—Subparagraph (A) of
section 2202(2) of such Act (42 U.S.C. 300bb–
2(2)) (relating to period of coverage) is amend-
ed to read as follows:
‘‘(A) MAXIMUM REQUIRED PERIOD.—
‘‘(i) IN GENERAL.—The date which is
36 months after the date of the qualifying
event.
‘‘(ii) QUALIFYING EVENT INVOLVING
MEDICARE ENTITLEMENT.—In the case of
an event described in section 2203(4)
(without regard to whether such event is a
qualifying event), the period of coverage
for qualified beneficiaries other than the
covered employee for such event or any
subsequent qualifying event shall not ter-
minate before the close of the 36-month
period beginning on the date the covered
employee becomes entitled to benefits
under title XVIII of the Social Security
Act.’’
(B) TECHNICAL
AMENDMENT.—The last
sentence of section 2202(3) of such Act is
amended to read as follows: ‘‘In the case of an
individual who is determined, under title II or
XVI of the Social Security Act, to have been
disabled at the time of a qualifying event de-
scribed in section 2203(2), any reference in
subparagraph (A) to ‘102 percent’ is deemed a
reference to ‘150 percent’ for any month after
the 36th month of continuation coverage.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to—
(1) qualifying events occurring after December
31, 1995, and
(2) qualifying events occurring on or before
such date if the period of continuation coverage re-
quired under section 4980B of the Internal Revenue
Code of 1986 (determined without regard to the
amendments made by this section) has not expired
on or before such date.
TITLE II—INSURANCE REFORM
Subtitle A—Employer Insurance
Protections
SEC. 201. SMALL GROUP EMPLOYER INSURANCE PROTEC-
TIONS.
(a) REQUIREMENTS
FOR INSURERS.—Any health
benefit insurer that provides or offers a small group health
benefit plan within a State (in this subtitle referred to as
a ‘‘covered insurer’’) must meet the requirements specified
in this section with respect to such a plan.
(b) SMALL EMPLOYER PROTECTION AGAINST TER-
MINATION OR NON-RENEWAL OR INDUSTRY BLACKLIST-
ING.—
(1) IN GENERAL.—A covered insurer may not—
(A) cancel or nonrenew an individual small
employer group because of high claims costs or
the health of the group, or
(B) refuse to provide coverage to such a
group based solely on the nature of the employ-
er’s business or industry.
(2) PERMISSIBLE TERMINATION.—A covered in-
surer may cancel or nonrenew a small group health
benefit plan for an individual small employer group
for any of the following:
(A) Failure to make premium payments.
(B) Failure to remain eligible for inclusion
in the class of business by which its coverage
was provided.
(C) Failure to comply with the insurer’s
minimum participation requirements.
(D) Fraud or misrepresentation by the
employer.
(3) CANCELLATION OF CLASS OF BUSINESS.—
(A) IN GENERAL.—A covered insurer may
cancel or nonrenew an entire class of business
with respect to a small group health benefit
plan.
(B) LIMITATION ON MARKET REENTRY.—
In the case of such a cancellation or
nonrenewal, the insurer may not write new
business with the same or similar class of small
group employers for a period of 5 years begin-
ning on the date of termination of the last plan
so cancelled or not renewed.
(c) LIMITS ON PREMIUM RATES.—The annual in-
crease in the premium rate charged to a small employer
group by a covered insurer may not exceed the sum of
the following:
(1) The percentage change in the premium rate
for new business for employers with similar case
characteristics, as measured between the first day of
the year in which the new rates take effect and the
first day of the previous year.
(2) A percentage (not to exceed 15 percent)
based on claims experience, health status, or dura-
tion of coverage.
(3) Any adjustment due to changes in the cov-
erage provided or changes in the case characteristics
of the small employer group.
(d) LIMIT ON VARIATION IN PREMIUMS.—
(1) ACROSS CLASSES OF BUSINESS.—The index
rate for a rating period for any class of business
shall not exceed the index rate for any other class
of business by more than 20 percent.
(2) WITHIN
A
CLASS
OF
BUSINESS.—For a
class of business, the premium rates charged during
a rating period to small employer groups with simi-
lar case characteristics for the same or similar cov-
erage (or rates that could be charged to such em-
ployers under the rating system for that class of
business) shall not vary from the index rate for such
class by more than 25 percent of the index rate.
(3) USE
OF
INDUSTRY
AS
A
CASE
CHAR-
ACTERISTIC.—
(A) IN
GENERAL.—Subject to subpara-
graph (B), a covered insurer may utilize indus-
try as a case characteristic in establishing pre-
mium rates.
(B) LIMITATION ON VARIATION.—If a cov-
ered insurer that utilizes industry as a case
characteristic in establishing premium rates,
the highest rate factor associated with an in-
dustry classification may not exceed the lowest
rate associated with any industry classification
by more than 15 percent.
SEC. 202. GENERAL PORTABILITY REQUIREMENT FOR EM-
PLOYER-BASED HEALTH INSURANCE.
(a) LIMITATIONS ON USE OF PREEXISTING CONDI-
TIONS.—
(1) IN GENERAL.—A group health benefit plan
of an employer shall not deny, exclude, or limit bene-
fits for a covered individual for losses incurred more
than 12 months following the effective date of the
individual’s coverage due to a preexisting condition.
(2) RESTRICTIONS
ON
DEFINITION
OF
PRE-
EXISTING CONDITION.—For purposes of paragraph
(1), such a plan shall not define a preexisting condi-
tion more restrictively than the following:
(A) A condition that would have caused an
ordinarily prudent person to seek medical ad-
vice, diagnosis, care, or treatment during the 6
months immediately preceding the effective date
of coverage.
(B) A condition for which medical advice,
diagnosis, care, or treatment was recommended
or received during the 6 months immediately
preceding the effective date of coverage.
(C) A pregnancy existing on the effective
date of coverage.
(b) LIMITATION ON UNDERWRITING.—
(1) IN GENERAL.—In the case of a previously
covered individual who becomes an employee of an
employer, the group health plan of (or contributed to
by) the employer shall accept the individual for cov-
erage upon the date of application for coverage on
the basis relating to the individual’s health status as
of the date the individual applied for employment
with the previous employer.
(2) PREVIOUSLY
COVERED
INDIVIDUAL
DE-
FINED.—For purposes of paragraph (1), the term
‘‘previously covered individual’’ means, with respect
to an employer, an individual who before employ-
ment by the employer was an employee of another
employer and was provided coverage under a group
health plan of (or contributed to by) the previous
employer.
(c) RESTRICTIONS FOR SMALL EMPLOYER HEALTH
PLANS.—
(1) IN GENERAL.—No insurer offering a health
benefit plan to a small employer shall refuse to ac-
cept under the plan any individual who, on the date
of the application for such coverage, has been con-
tinuously covered (as defined in paragraph (2)) and
would be eligible for such coverage except for under-
writing considerations relating to the individual’s
health status.
(2) CONTINUOUS COVERAGE.—
(A) IN GENERAL.—For purposes of this
subsection, an individual is deemed to be con-
tinuously covered as of a date if the individual
is covered under any employee health benefit
plan or other health insurance policy at the be-
ginning and end of the 1-year period ending
with such date and has not had any lapse in
such coverage during such period totalling more
than 31 days, not including as such a lapse any
applicable employment waiting or probationary
period.
(B) SPECIAL RULE.—For purposes of sub-
paragraph (A), there shall not be taken into ac-
count coverage provided by or in connection
with any State high risk insurance pool.
(d) CONSTRUCTION.—Nothing in this section shall be
construed as requiring an insurer or health benefit plan
to provide benefits greater than those provided to an indi-
vidual insured as a standard risk had the previous cov-
erage remained in force.
(e) DEFINITIONS.—For purposes of this section:
(1) COVERED INDIVIDUAL.—The term ‘‘covered
individual’’ means—
(A) an individual who is (or will be) pro-
vided coverage under a group health plan by
virtue of the performance of services by the in-
dividual for 1 or more persons maintaining the
plan (including as an employee defined in sec-
tion 401(c)(1) of the Internal Revenue Code of
1986), and
(B) the spouse or any dependent child of
such individual.
(2) GROUP HEALTH PLAN.—The term ‘‘group
health plan’’ has the meaning given such term by
section 5000(b)(1) of the Internal Revenue Code of
1986.
SEC. 203. EXEMPTION FROM CERTAIN STATE MANDATES.
An covered insurer that complies with the require-
ments of sections 201 and 202 with respect to a small
employer group is exempt from State law requirements
concerning the providing of specified health insurance ben-
efits or laws which prohibit the use of managed care net-
works.
SEC. 204. ENFORCEMENT.
(a) IN GENERAL.—Chapter 47 of the Internal Reve-
nue Code of 1986 (relating to taxes on group health plans)
is amended by adding at the end thereof the following new
section:
‘‘SEC. 5000A. ENFORCEMENT OF REQUIREMENTS FOR EM-
PLOYER HEALTH BENEFIT PLANS.
‘‘(a) GENERAL RULE.—There is hereby imposed a
tax on the failure of an insurer or group health plan to
meet the applicable requirements of section 201 or 202
of the Bipartisan Health Security Reform Act of 1994
with respect to any covered individual.
‘‘(b) AMOUNT OF TAX.—
‘‘(1) IN GENERAL.—The amount of the tax im-
posed by subsection (a) on any failure with respect
to—
‘‘(A) a requirement in such section 201
shall be $100 for each day in the noncompli-
ance period with respect to such failure; or
‘‘(B) a requirement in such section 202
with respect to a covered individual shall be
$100 for each day in the noncompliance period
with respect to such failure.
‘‘(2) NONCOMPLIANCE PERIOD.—For purposes
of this section, the term ‘noncompliance period’
means, with respect to any failure, the period—
‘‘(A) beginning on the date such failure
first occurs, and
‘‘(B) ending on the date such failure is
corrected.
‘‘(3) CORRECTION.—A failure of a group health
plan to meet the requirements of section 202 of the
Bipartisan Health Security Reform Act of 1994 with
respect to any covered individual shall be treated as
corrected if—
‘‘(A) such failure is retroactively undone to
the extent possible, and
‘‘(B) the covered individual is placed in a
financial position which is as good as such indi-
vidual would have been in had such failure not
occurred.
For purposes of applying subparagraph (B), the cov-
ered individual shall be treated as if the individual
had elected the most favorable coverage in light of
the expenses incurred since the failure first oc-
curred.
‘‘(c) LIMITATIONS ON AMOUNT OF TAX.—
‘‘(1) TAX NOT TO APPLY WHERE FAILURE NOT
DISCOVERED
EXERCISING
REASONABLE
DILI-
GENCE.—No tax shall be imposed by subsection (a)
on any failure during any period for which it is es-
tablished to the satisfaction of the Secretary that
none of the persons referred to in subsection (d)
knew, or exercising reasonable diligence would have
known, that such failure existed.
‘‘(2) TAX NOT TO APPLY TO FAILURES COR-
RECTED WITHIN 30 DAYS.—No tax shall be imposed
by subsection (a) on any failure if—
‘‘(A) such failure was due to reasonable
cause and not to willful neglect, and
‘‘(B) such failure is corrected during the
30-day period beginning on the first date any of
the persons referred to in subsection (d) knew,
or exercising reasonable diligence would have
known, that such failure existed.
‘‘(3) 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 rel-
ative to the failure involved.
‘‘(d) LIABILITY FOR TAX.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, the following shall be liable
for the tax imposed by subsection (a) on a failure:
‘‘(A) In the case of a group health plan
other than a self-insured group health plan, the
issuer.
‘‘(B)(i) In the case of a self-insured group
health plan other than a multiemployer group
health plan, the employer.
‘‘(ii) In the case of a self-insured group
health multiemployer plan, the plan.
‘‘(C) Each person who is responsible (other
than in a capacity as an employee) for admin-
istering or providing benefits under the group
health plan, health insurance plan, or other
health benefit arrangement (including a self-in-
sured plan) and whose act or failure to act
caused (in whole or in part) the failure.
‘‘(2) SPECIAL RULES FOR PERSONS DESCRIBED
IN PARAGRAPH (1)(C).—A person described in sub-
paragraph (C) (and not in subparagraphs (A) and
(B)) of paragraph (1) shall be liable for the tax im-
posed by subsection (a) on any failure only if such
person assumed (under a legally enforceable written
agreement) responsibility for the performance of the
act to which the failure relates.’’.
(b) NONDEDUCTIBILITY OF TAX.—Paragraph (6) of
section 275(a) of such Code (relating to nondeductibility
of certain taxes) is amended by inserting ‘‘47,’’ after
‘‘46,’’.
(c) CLERICAL AMENDMENTS.—The table of sections
for such chapter 47 is amended by adding at the end
thereof the following new item:
‘‘Sec. 5000A. Enforcement of requirements for employer health
benefit plans.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 205. DEFINITIONS.
In this subtitle:
(1) CASE CHARACTERISTICS.—The term ‘‘case
characteristics’’ means demographic, geographic, and
other relevant characteristics as determined by the
insurer that are considered by the insurer in the de-
termination of premium rates for a small employer,
but not including—
(A) claims experience,
(B) health status, and
(C) duration of coverage since date of
issue.
(2) INSURER.—The term ‘‘insurer’’ means an
entity that provides health insurance in a State.
(3) SMALL EMPLOYER.—The term ‘‘small em-
ployer’’ means a business that, during the most re-
cent calendar year, employed at least 3, but not
more than 25, employees who are eligible for cov-
erage under a health benefit plan on at least 50 per-
cent of that business’ working days.
(4) 
HEALTH
BENEFIT
PLAN.—The 
term
’’health benefit plan’’ means any employee welfare
benefit plan (as defined in the Employee Retirement
Income Security Act of 1974) that is insured by an
insurer that provides medical, surgical, or hospital
care or benefits to employees of a small employer
and their dependents and to which the employer con-
tributes 50 percent or more of the single coverage
cost at the time of purchase. Such term does not in-
clude any individual major medical policies and
group insurance that are not designed or adminis-
tered as a health benefit plan to be provided by an
employer for its employees.
(5) INDEX
RATE.—The term ‘‘index rate’’
means, for a class of business as to a small employ-
er’s rating period with similar case characteristics,
the arithmetic average of the applicable base pre-
mium rate and the corresponding highest premium
rate.
(6) CLASS OF BUSINESS.—The term ‘‘class of
business’’ means each separate class of business es-
tablished by an insurer to reflect substantial dif-
ferences in expected claims experience or administra-
tive costs related only to one or more of the follow-
ing:
(A) The insurer’s use of more than one
type of system for the marketing and sale of
health benefit plans to small employers.
(B) The insurer’s acquisition of a class of
business from another insurer.
(C) The insurer providing coverage to one
or more association groups.
SEC. 206. EFFECTIVE DATE.
This title shall take effect on January 1, 1996.
Subtitle 
B—Guaranteeing 
Port-
ability of Health Insurance for
Individuals
SEC. 211. COVERAGE OF INDIVIDUAL HEALTH BENEFIT
PLANS.
(a) IN GENERAL.—This subtitle applies only to
health benefit plans delivered or issued for delivery to indi-
viduals in a State and does not apply to—
(1) any employer-based health benefit plan, or
(2) any eligible individual whose prior similar
health benefit plan was provided by—
(A) a State high risk pool (as defined by
the Secretary of Health and Human Services),
(B) under title XVIII or XIX of the Social
Security Act, or
(C) under another State or Federal pro-
gram, unless the eligible individual was pre-
viously covered as an employee of the State or
Federal Government.
(b) INDIVIDUAL HEALTH BENEFIT PLAN.—In this
subtitle, the term ‘‘individual health benefit plan’’ means
a health benefit plan described in subsection (a).
SEC. 212. PORTABILITY PROTECTIONS.
(a) CONSIDERATION OF APPLICATIONS.—If an eligi-
ble individual or eligible family applies for an individual
health benefit plan, the insurer offering the plan must ei-
ther—
(1) offer coverage to all eligible individuals ap-
plying on the same application, or
(2) deny coverage to all eligible individuals ap-
plying on the application.
(b) PREEXISTING
CONDITION
PERIOD
LIMITA-
TION.—No policy provision of an individual health benefit
plan shall exclude or limit coverage for a preexisting condi-
tion for a period beyond 12 months following the effective
date of the individual’s coverage.
(c) PORTABILITY OF COVERAGE.—The preexisting
condition limitation period under any individual health
benefit plan shall be reduced by one month for each month
of continuous coverage the eligible individual had under
a prior health benefit plan.
(d) LIMITATION ON RIDERS.—
(1) IN GENERAL.—Except as provided in para-
graph (2), an insurer issuing an individual health
benefit plan may not modify the plan with respect
to an eligible individual.
(2) RELATION TO PREEXISTING CONDITION EX-
CLUSION PERIOD.—
(A) IN GENERAL.—To the extent that a
preexisting condition limitation applies, an in-
surer may restrict or exclude coverage or bene-
fits for a specific condition for a maximum pe-
riod of 12 months from the effective date of
coverage of an eligible individual by way of
rider or endorsement.
(B) NO ADDITION RIDERS.—No other rider
or endorsement may be placed on the health
benefit plan to restrict further coverage.
(C) COMBINATION.—If both a rider and a
preexisting condition exclusion period are used,
the combined limitation period may not exceed
12 months.
(e) NO DISCLOSURE OF CONDITION REQUIRED.—A
preexisting condition limitation period may be applied
whether or not the specific condition has been disclosed
on the application for coverage under the individual health
benefit plan.
SEC. 213. DEFINITIONS.
In this subtitle:
(1) ELIGIBLE
FAMILY.—The term ‘‘eligible
family’’ means an applicant, an applicant’s spouse,
and any eligible individual who is a dependent child
of the applicant.
(2) ELIGIBLE INDIVIDUAL.—The term ‘‘eligible
individual’’ means an individual who was insured
under a prior similar health benefit plan which was
continuous to a date not more than 30 days prior
to the effective date of the new health benefit plan
for that individual.
(3) HEALTH BENEFIT PLAN.—
(A) IN GENERAL.—The term ‘‘health bene-
fit plan’’ means any hospital or medical expense
insured policy or certificate, hospital or medical
service plan contract, or health maintenance or-
ganization subscriber contract.
(B) EXCLUSION.—Such term does not in-
clude any of the following:
(i) short-term limited duration insur-
ance,
(ii) accident-only, credit-only, dental-
only, vision-only insurance,
(iii) medicare supplement insurance,
(iv) hospital indemnity insurance,
(v) long-term care or disability income
insurance,
(vi) coverage issued as a supplement
to liability insurance,
(vii) workmen’s compensation or simi-
lar insurance, or
(viii) automobile medical-payment in-
surance.
(4) PREEXISTING CONDITION.—The term ‘‘pre-
existing condition’’ means any injury or illness—
(A) for which the covered individual re-
ceived medical advice or treatment within 12
months immediately preceding the applicable ef-
fective date the covered individual became in-
sured under the policy, or
(B) which in the opinion of a qualified doc-
tor—
(i) probably began prior to the appli-
cable effective date the covered individual
became insured under the policy, and
(ii) manifested symptoms which would
cause an ordinarily prudent individual to
seek diagnosis or treatment within 12
months immediately preceding the applica-
ble effective date the covered individual be-
cause insured under the policy.
(5) PRIOR SIMILAR HEALTH BENEFIT PLAN.—
The term ‘‘prior similar health benefit plan’’ means
a health benefit plan under which an eligible individ-
ual was previously covered and which provides bene-
fits who do not materially differ from the new health
benefit plan in any of the following respects:
(A) The type of medical benefits provided.
(B) The level of medical benefits available
based 
on 
deductibles, 
coinsurance, 
or
copayments, or any combination thereof.
(C) The maximum benefits available for
specific services.
(D) Cost containment provisions.
SEC. 214. EFFECTIVE DATE.
This subtitle shall apply to each health benefit plan
that is delivered or issued for delivery to an individual on
or after January 1, 1996.
Subtitle C—Assuring Health Insur-
ance Coverage for Uninsurable
Individuals
SEC. 221. ESTABLISHMENT OF PROGRAMS BY STATES.
(a) IN GENERAL.—For years beginning with 1997,
each State shall establish, administer, and fund a high
risk health insurance pool (in this subtitle referred to as
a ‘‘State high risk program’’) that assures, in accordance
with this subtitle, the availability of qualified health insur-
ance coverage to uninsurable individuals.
(b) DEADLINE.—Each State shall comply with sub-
section (a) by not later than January 1, 1997.
(c) WAIVER.—Subsection (a) shall not apply in the
case of a State that has established a comprehensive
health insurance program that assures the availability of
qualified health insurance coverage to all eligible individ-
uals residing in the State.
(d) RECOMMENDATION FOR COMPLIANCE REQUIRE-
MENT.—Not later than January 1, 1996, the Secretary
of Health and Human Services shall submit to Congress
a recommendation on appropriate sanctions for States
that fail to meet the requirement of subsection (a).
SEC. 222. UNINSURABLE INDIVIDUALS ELIGIBLE FOR COV-
ERAGE.
(a) UNINSURABLE AND ELIGIBLE INDIVIDUAL DE-
FINED.—In this subtitle:
(1) UNINSURABLE
INDIVIDUAL.—The term
‘‘uninsurable individual’’ means, with respect to a
State, an eligible individual who presents proof of
uninsurability by 2 private insurers in accordance
with subsection (b).
(2) ELIGIBLE INDIVIDUAL.—The term ‘‘eligible
individual’’ means, with respect to a State, a citizen
or national of the United States (or an alien lawfully
admitted for permanent residence) who is a resident
of the State for at least 90 days.
(b) PROOF OF UNINSURABILITY.—
(1) IN GENERAL.—The proof of uninsurability
for an individual shall be in the form of—
(A) a notice of rejection or refusal to issue
substantially similar insurance for health rea-
sons, or
(B) a notice of refusal to insure except at
a rate in excess of the plan rate,
(C) an offer to insure but only subject to
a reduction or an exclusion of coverage for a
preexisting condition for a period exceeding 6
months.
(2) EXCEPTION.—A State may waive the re-
quirement of proof described in paragraph (1) in the
case of an individual who demonstrates a provable
medical or health condition.
SEC. 223. QUALIFIED HEALTH INSURANCE COVERAGE
UNDER PROGRAM.
In this subtitle, the term ‘‘qualified health insurance
coverage’’ means health insurance coverage that—
(1) provides benefits typical of major medical
insurance available in the individual health insur-
ance market, and
(2) may include coinsurance (in a percentage
not to exceed 20 percent) and a stop loss on out-of-
pocket expenses of not to exceed—
(A) for 1997, $5,000, or
(B) for a subsequent year, the dollar
amount specified in this paragraph for the pre-
vious year increased by the percentage increase
in the medical care component of the consumer
price index for all urban consumers (United
States city average, as published by the Bureau
of Labor Statistics) for the 12-month period
ending with September of the preceding cal-
endar year.