‘‘(B) LIMITATIONS.—This paragraph shall
not apply to any amount described in subpara-
graph (A) received by an individual from a
medical security account if, at any time during
the 1-year period ending on the day of such re-
ceipt, such individual received any other amount
described in subparagraph (A) from a medical
security account which was not includible in the
individual’s gross income because of the appli-
cation of this paragraph.
‘‘(C) ROLLOVER FROM MEDICAL SAVINGS
ACCOUNT.—An amount is not described in this
paragraph if such amount is paid or distributed
from a medical savings account (as defined in
section 220(d)(1)) to the account holder of such
account and if—
‘‘(i) at any time prior to such receipt,
such account holder received any other
amount from a medical savings account
which was contributed to a medical secu-
rity account, or
‘‘(ii) the amount from such medical
savings account contributed to the medical
security account exceeds the limitation
amount specified in subsection (b)(2).
‘‘(6) COORDINATION WITH MEDICAL EXPENSE
DEDUCTION.—For purposes of determining the
amount of the deduction under section 213, any pay-
ment or distribution out of a medical security ac-
count for qualified medical expenses shall not be
treated as an expense paid for medical care.
‘‘(7) TRANSFER OF ACCOUNT INCIDENT TO DI-
VORCE.—The transfer of an individual’s interest in
a medical security account to an individual’s spouse
or former spouse under a divorce or separation in-
strument described in subparagraph (A) of section
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 security
account with respect to which such spouse is the ac-
count holder.
‘‘(8) TREATMENT AFTER DEATH OF ACCOUNT
HOLDER.—
‘‘(A) TREATMENT IF DESIGNATED BENE-
FICIARY
IS
SPOUSE.—If the account holder’s
surviving spouse acquires such holder’s interest
in a medical security account by reason of being
the designated beneficiary of such account at
the death of the account holder, such medical
security 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 per-
son acquires the account holder’s interest
in a medical security account in a case to
which subparagraph (A) does not apply—
‘‘(I) such account shall cease to
be a medical security account as of
the date of death, and
‘‘(II) an amount equal to the fair
market value of the assets in such ac-
count on such date shall be includible
if such person is not the estate of
such holder, in such person’s gross in-
come for the taxable year which in-
cludes such date, or if such person is
the estate of such holder, in such
holder’s gross income for the last tax-
able 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 ex-
penses which were incurred by the de-
cedent before the date of the dece-
dent’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 section 691(c)
to any person (other than the dece-
dent or the decedent’s spouse) with
respect to amounts included in gross
income under clause (i) by such per-
son.
‘‘(g) COST-OF-LIVING ADJUSTMENT.—In the case of
any taxable year beginning in a calendar year after 1999,
the $5,000 amount in subsection (b)(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 1998’ for ‘calendar year 1992’ in subparagraph
(B) thereof.
If any increase under the preceding sentence is not a mul-
tiple of $50, such increase shall be rounded to the nearest
multiple of $50.
‘‘(h) REPORTS.—The Secretary may require the
trustee of a medical security account to make such reports
regarding such account to the Secretary and to the ac-
count holder with respect to contributions, distributions,
and such other matters as the Secretary determines appro-
priate. The reports 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.
‘‘(i) COORDINATION WITH OTHER MEDICAL SAVINGS
ACCOUNTS PROVISIONS.—No deduction shall be allowed
under subsection (a) for any expense for which a deduction
or credit is allowed under any other provision of this chap-
ter.’’.
(b) DEDUCTION ALLOWED WHETHER OR NOT INDI-
VIDUAL ITEMIZES OTHER DEDUCTIONS.—Subsection (a)
of section 62 of such Code is amended by inserting after
paragraph (17) the following new paragraph:
‘‘(18) MEDICAL SECURITY ACCOUNTS FOR INDI-
VIDUALS WHO ARE 40 OR OLDER.—The deduction al-
lowed by section 222.’’.
(c) EXCLUSIONS FOR EMPLOYER CONTRIBUTIONS TO
MEDICAL SECURITY ACCOUNTS.—Section 106 of such
Code is amended by adding at the end the following new
subsection:
‘‘(d) CONTRIBUTIONS TO MEDICAL SECURITY AC-
COUNTS.—
‘‘(1) IN GENERAL.—In the case of an employee
who is an eligible individual, amounts contributed by
such employee’s employer to any medical security ac-
count of such employee shall be treated as employer-
provided coverage for medical expenses under an ac-
cident or health plan to the extent such amounts do
not exceed the limitation under section 222(b) (de-
termined without regard to this subsection) which is
applicable to such employee for such taxable year.
‘‘(2) APPLICABLE RULES.—For purposes of this
subsection, rules similar to the rules of paragraphs
(2), (3), (4), and (5) of subsection (b) shall apply.
‘‘(3) ELIGIBLE INDIVIDUAL.—For purposes of
this subsection, the terms ‘eligible individual’ and
‘medical security account’ have the respective mean-
ings given to such terms by section 222.’’.
(d) EMPLOYER CONTRIBUTIONS REQUIRED TO BE
SHOWN ON W–2.—Section 6051(a) 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 inserting after paragraph (11)
the following new paragraph:
‘‘(12) the amount contributed to any medical
security account (as defined in section 222(c)) of
such employee or such employee’s spouse.’’.
(e) 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) in subsection (a) by striking ‘‘or’’ at the end
of paragraph (3), by inserting ‘‘or’’ at the end of
paragraph (4), and by inserting after paragraph (4)
the following new paragraph:
‘‘(5) a medical security account (within the
meaning of section 222(c)),’’, and
(2) by adding at the end the following new sub-
section:
‘‘(g) EXCESS CONTRIBUTIONS TO MEDICAL SECU-
RITY ACCOUNTS.—For purposes of this section, in the
case of medical security accounts (within the meaning of
section 222(e)), the term ‘excess contributions’ means the
sum of—
‘‘(1) the aggregate amount contributed for the
taxable year to the accounts (other than rollover
contributions described in section 222(f)(5)) which is
neither excludable from gross income under section
106(b) nor allowable as a deduction under section
222 for such year, 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 222(f)(2), and
‘‘(B) the excess (if any) of—
‘‘(i) the maximum amount allowable
as a deduction under section 222(b) (deter-
mined 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 distributed out of the medical savings account in a dis-
tribution to which section 222(f)(3) applies shall be treat-
ed as an amount not contributed.’’.
(f) TAX ON PROHIBITED TRANSACTIONS.—
(1) Subsection (c) of section 4975 of such Code
is amended by adding at the end the following new
paragraph:
‘‘(4) SPECIAL
RULE
FOR
MEDICAL
SECURITY
ACCOUNTS.—An individual for whose benefit a medi-
cal security account (within the meaning of section
222(c) 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 section
222(e)(2) applies to such transaction.’’.
(2) Paragraph (1) of section 4975(e) of such
Code is amended by striking ‘‘or’’ at the end of sub-
paragraph (E), by redesignating subparagraph (F)
as subparagraph (G), and by inserting after sub-
paragraph (E) the following new subparagraph:
‘‘(F) a medical security account described
in section 222(c).’’.
(g) FAILURE TO PROVIDE REPORTS ON MEDICAL
SECURITY ACCOUNTS.—Paragraph (2) of section 6693(a)
of such Code is amended by striking ‘‘and’’ at the end
of subparagraph (C), by striking the period at the end of
subparagraph (D) and inserting ‘‘, and’’, and by inserting
after subparagraph (D) the following new subparagraph:
‘‘(E) Section 222(h) (relating to medical
security accounts for individuals who are 40 or
older).’’.
(h) 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. 222. Medical security accounts for individuals who are 40
or older.
‘‘Sec. 223. Cross reference.’’.
(i) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1998.
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