terms ‘eligible individual’ and ‘medical savings ac-
count’ have the respective meanings given to such
terms by section 220.
‘‘(2) NO CONSTRUCTIVE RECEIPT.—No amount
shall be included in the gross income of any em-
ployee solely because the employee may choose be-
tween the contributions referred to in paragraph (1)
and employer contributions to another health plan of
the employer.
‘‘(3) TRANSFERS
FROM
FLEXIBLE
SPENDING
ARRANGEMENTS.—
‘‘(A) IN GENERAL.—A flexible spending ar-
rangement for health shall not cease to be
treated as such an arrangement, and no
amount shall be includible in the gross income
of the employee, solely because amounts not
paid out as reimbursements under such ar-
rangement are contributed to a medical savings
account of such employee.
‘‘(B) 
FLEXIBLE
SPENDING
ARRANGE-
MENT.—For purposes of this paragraph, a
flexible spending arrangement is a benefit pro-
gram which provides employees with coverage
under which—
‘‘(i) specified incurred expenses may
be reimbursed (subject to reimbursement
maximums and other reasonable condi-
tions), and
‘‘(ii) the maximum amount of reim-
bursement which is reasonably available to
a participant for such coverage is less than
500 percent of the cost of such coverage.
In the case of an insured plan, the maximum
amount reasonably available shall be deter-
mined on the basis of the underlying coverage.
‘‘(4) COORDINATION WITH DEDUCTION LIMITA-
TION.—The amount excluded from the gross income
of an employee under this subsection for any taxable
year shall not exceed the limitation under section
220(b)(1) (determined without regard to this sub-
section) which is applicable to such employee for
such taxable year.’’
(2) EXCLUSION FROM EMPLOYMENT TAXES.—
(A) SOCIAL SECURITY TAXES.—
(i) 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 para-
graph:
‘‘(22) any payment made to or for the benefit
of an employee if at the time of such payment it is
reasonable to believe that the employee will be able
to exclude such payment from income under section
106(b).’’
(ii) Subsection (a) of section 209 of
the Social Security Act is amended by
striking ‘‘or’’ at the end of paragraph (17),
by striking the period at the end of para-
graph (18) and inserting ‘‘; or’’, and by in-
serting after paragraph (18) the following
new paragraph:
‘‘(19) any payment made to or for the benefit
of an employee if at the time of such payment it is
reasonable to believe that the employee will be able
to exclude such payment from income under section
106(b) of the Internal Revenue Code of 1986.’’
(B) RAILROAD
RETIREMENT
TAX.—Sub-
section (e) of section 3231 of such Code is
amended by adding at the end the following
new paragraph:
‘‘(10) MEDICAL SAVINGS ACCOUNT CONTRIBU-
TIONS.—The term ‘compensation’ shall not include
any payment made to or for the benefit of an em-
ployee if at the time of such payment it is reason-
able to believe that the employee will be able to ex-
clude such payment from income under section
106(b).’’
(C) 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 following new paragraph:
‘‘(17) any payment made to or for the benefit
of an employee if at the time of such payment it is
reasonable to believe that the employee will be able
to exclude such payment from income under section
106(b).’’
(D) WITHHOLDING
TAX.—Subsection (a)
of section 3401 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(b).’’
(d) TAX ON PROHIBITED TRANSACTIONS.—Section
4975 of such Code (relating to tax on prohibited trans-
actions) is amended—
(1) by adding at the end of subsection (c) the
following new paragraph:
‘‘(4) SPECIAL RULE FOR MEDICAL SAVINGS AC-
COUNTS.—An individual for whose benefit a medical
savings account (within the meaning of section
220(d)) is established shall be exempt from the tax
imposed by this section with respect to any trans-
action concerning such account (which would other-
wise be taxable under this section) if, with respect
to such transaction, the account ceases to be a medi-
cal savings account by reason of the application of
section 220(e)(2) to such account.’’, and
(2) by inserting ‘‘or a medical savings account
described in section 220(d)’’ in subsection (e)(1)
after ‘‘described in section 408(a)’’.
(e) FAILURE TO PROVIDE REPORTS ON MEDICAL
SAVINGS ACCOUNTS.—Section 6693 of such Code (relat-
ing to failure to provide reports on individual retirement
accounts or annuities) is amended—
(1) by inserting ‘‘OR ON MEDICAL 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 220(h) to
file a report regarding a medical savings account at
the time and in the manner required by such section
shall pay a penalty of $50 for each failure to so file
unless it is shown that such failure is due to reason-
able cause.’’
(f) CLERICAL AMENDMENTS.—
(1) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by
striking the last item and inserting the following:
‘‘Sec. 220. Medical savings accounts.
‘‘Sec. 221. Cross reference.’’
(2) The table of sections for subchapter B of
chapter 68 of such Code is amended by inserting ‘‘or
on medical savings accounts’’ after ‘‘annuities’’ in
the item relating to section 6693.
(g) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
Æ
HR 1818 IH——2