payment of such remuneration it is reasonable to be-
lieve that a corresponding deduction is allowable
under section 220 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 thereof the following new paragraph:
‘‘(10) EMPLOYER CONTRIBUTIONS TO MEDICAL
SAVINGS ACCOUNTS.—The term ‘compensation’ shall
not include any payment made to or on behalf of an
employee if (and to the extent that) at the time of
payment of such remuneration it is reasonable to be-
lieve that a corresponding deduction is allowable
under section 220.’’
(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) remuneration paid to or on behalf of
an employee if (and to the extent that) at the
time of payment of such remuneration it is rea-
sonable to believe that a corresponding deduc-
tion is allowable under section 220.’’
(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) remuneration paid to or on behalf of
an employee if (and to the extent that) at the
time of payment of such remuneration it is rea-
sonable to believe that a corresponding deduc-
tion is allowable under section 220.’’
(d) 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
SAVINGS
AC-
COUNTS,’’ 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 savings account (within the
meaning of section 220(c)),’’,
(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 SAVINGS
ACCOUNTS.—For purposes of this section, in the case of
a medical savings account, the term ‘excess contributions’
means the amount by which the amount contributed for
the taxable year to the account exceeds the amount allow-
able as a deduction under section 220 for such taxable
year. For purposes of this subsection, any contribution
which is distributed out of the medical savings account
and a distribution to which section 220(d)(2) applies shall
be treated as an amount not contributed.’’
(e) 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 SAVINGS AC-
COUNTS.—An individual for whose benefit a medical
savings account 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 savings account by reason of the applica-
tion of section 220(e)(2)(A) to such account.’’, and
(2) by inserting ‘‘or a medical savings account
described in section 220(c)’’ in subsection (e)(1)
after ‘‘described in section 408(a)’’.
(f) FAILURE TO PROVIDE REPORTS ON MEDICAL
SAVINGS ACCOUNTS.—Section 6693 of such Code (relat-
ing to failure to provide reports on individual retirement
account 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(i) 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 unless it
is shown that such failure is due to reasonable
cause.’’
(g) 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 item relating to section 220 and insert-
ing the following:
‘‘Sec. 220. Medical savings accounts.
‘‘Sec. 221. Cross reference.’’
(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 savings accounts, certain 403(b)
contracts, and certain individual retirement annu-
ities.’’
(3) 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.
(h) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1995.
SEC. 102. UNUSED AMOUNTS IN FLEXIBLE SPENDING AC-
COUNTS TRANSFERABLE TO MEDICAL SAV-
INGS 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 SAVINGS ACCOUNTS.—
‘‘(A) IN
GENERAL.—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 arrangement for health and disability
for the benefit of an individual are contributed
to a medical savings account (as defined in sec-
tion 220(c)) for the benefit of such individual.
‘‘(B) SPECIAL RULES.—
‘‘(i) TIMING
OF
CONTRIBUTIONS.—
Contributions made under this paragraph
shall be made on the last day of the plan
year of the cafeteria plan.
‘‘(ii) AVAILABILITY REQUIREMENT.—
Subparagraph (A) shall apply only if the
plan is available to at least 80 percent of
the employees of the employer. For pur-
poses of the preceding sentence, there shall
be excluded employees who are excluded
under section 414(q)(8) or who would be
so excluded if ‘30’ were substituted for
‘171⁄2’ in subparagraph (B) thereof.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 1995.