SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Health Opportunity Patient 
Empowerment Act of 2006''.

SEC. 2. FSA AND HRA TERMINATIONS TO FUND HSAS.

    (a) In General.--Section 106 of the Internal Revenue Code of 1986 
(relating to contributions by employer to accident and health plans) is 
amended by adding at the end the following new subsection:
    ``(e) FSA and HRA Terminations to Fund HSAs.--
            ``(1) In general.--A plan shall not fail to be treated as a 
        health flexible spending arrangement or health reimbursement 
        arrangement under this section or section 105 merely because 
        such plan provides for a qualified HSA distribution.
            ``(2) Qualified hsa distribution.--The term `qualified HSA 
        distribution' means a distribution from a health flexible 
        spending arrangement or health reimbursement arrangement to the 
        extent that such distribution--
                    ``(A) does not exceed the lesser of the balance in 
                such arrangement on September 21, 2006, or as of the 
                date of such distribution, and
                    ``(B) is contributed by the employer directly to 
                the health savings account of the employee before 
                January 1, 2012.
        Such term shall not include more than 1 distribution with 
        respect to any arrangement.
            ``(3) Additional tax for failure to maintain high 
        deductible health plan coverage.--
                    ``(A) In general.--If, at any time during the 
                testing period, the employee is not an eligible 
                individual, then the amount of the qualified HSA 
                distribution--
                            ``(i) shall be includible in the gross 
                        income of the employee for the taxable year in 
                        which occurs the first month in the testing 
                        period for which such employee is not an 
                        eligible individual, and
                            ``(ii) the tax imposed by this chapter for 
                        such taxable year on the employee shall be 
                        increased by 10 percent of the amount which is 
                        so includible.
                    ``(B) Exception for disability or death.--Clauses 
                (i) and (ii) of subparagraph (A) shall not apply if the 
                employee ceases to be an eligible individual by reason 
                of the death of the employee or the employee becoming 
                disabled (within the meaning of section 72(m)(7)).
            ``(4) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Testing period.--The term `testing period' 
                means the period beginning with the month in which the 
                qualified HSA distribution is contributed to the health 
                savings account and ending on the last day of the 12th 
                month following such month.
                    ``(B) Eligible individual.--The term `eligible 
                individual' has the meaning given such term by section 
                223(c)(1).
                    ``(C) Treatment as rollover contribution.--A 
                qualified HSA distribution shall be treated as a 
                rollover contribution described in section 223(f)(5).
            ``(5) Tax treatment relating to distributions.--For 
        purposes of this title--
                    ``(A) In general.--A qualified HSA distribution 
                shall be treated as a payment described in subsection 
                (d).
                    ``(B) Comparability excise tax.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), section 4980G shall not apply to 
                        qualified HSA distributions.
                            ``(ii) Failure to offer to all employees.--
                        In the case of a qualified HSA distribution to 
                        any employee, the failure to offer such 
                        distribution to any eligible individual covered 
                        under a high deductible health plan of the 
                        employer shall (notwithstanding section 
                        4980G(d)) be treated for purposes of section 
                        4980G as a failure to meet the requirements of 
                        section 4980G(b).''.
    (b) Certain FSA Coverage Disregarded Coverage.--Subparagraph (B) of 
section 223(c)(1) of such Code (relating to certain coverage 
disregarded) is amended by striking ``and'' at the end of clause (i), 
by striking the period at the end of clause (ii) and inserting ``, 
and'', and by inserting after clause (ii) the following new clause:
                            ``(iii) for taxable years beginning after 
                        December 31, 2006, coverage under a health 
                        flexible spending arrangement during any period 
                        immediately following the end of a plan year of 
                        such arrangement during which unused benefits 
                        or contributions remaining at the end of such 
                        plan year may be paid or reimbursed to plan 
                        participants for qualified benefit expenses 
                        incurred during such period if--
                                    ``(I) the balance in such 
                                arrangement at the end of such plan 
                                year is zero, or
                                    ``(II) the individual is making a 
                                qualified HSA distribution (as defined 
                                in section 106(e)) in an amount equal 
                                to the remaining balance in such 
                                arrangement as of the end of such plan 
                                year, in accordance with rules 
                                prescribed by the Secretary.''.
    (c) Application of Section.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to distributions on or after the date of the 
        enactment of this Act.
            (2) Subsection (b).--The amendment made by subsection (b) 
        shall take effect on the date of the enactment of this Act.

SEC. 3. REPEAL OF ANNUAL DEDUCTIBLE LIMITATION ON HSA CONTRIBUTIONS.

    (a) In General.--Paragraph (2) of section 223(b) of the Internal 
Revenue Code of 1986 (relating to monthly limitation) is amended--
            (1) in subparagraph (A) by striking ``the lesser of--'' and 
        all that follows and inserting ``$2,250.'', and
            (2) in subparagraph (B) by striking ``the lesser of--'' and 
        all that follows and inserting ``$4,500.''.
    (b) Conforming Amendment.--Section 223(d)(1)(A)(ii)(I) of such Code 
is amended by striking ``subsection (b)(2)(B)(ii)'' and inserting 
``subsection (b)(2)(B)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 4. MODIFICATION OF COST-OF-LIVING ADJUSTMENT.

    Paragraph (1) of section 223(g) of the Internal Revenue Code of 
1986 (relating to cost-of-living adjustment) is amended by adding at 
the end the following new flush sentence:
        ``In the case of adjustments made for any taxable year 
        beginning after 2007, section 1(f)(4) shall be applied for 
        purposes of this paragraph by substituting `March 31' for 
        `August 31', and the Secretary shall publish the adjusted 
        amounts under subsections (b)(2) and (c)(2)(A) for taxable 
        years beginning in any calendar year no later than June 1 of 
        the preceding calendar year.''.

SEC. 5. CONTRIBUTION LIMITATION NOT REDUCED FOR PART-YEAR COVERAGE.

    (a) Increase in Limit for Individuals Becoming Eligible Individuals 
After Beginning of the Year.--Subsection (b) of section 223 of the 
Internal Revenue Code of 1986 (relating to limitations) is amended by 
adding at the end the following new paragraph:
            ``(8) Increase in limit for individuals becoming eligible 
        individuals after the beginning of the year.--
                    ``(A) In general.--For purposes of computing the 
                limitation under paragraph (1) for any taxable year, an 
                individual who is an eligible individual during the 
                last month of such taxable year shall be treated--
                            ``(i) as having been an eligible individual 
                        during each of the months in such taxable year, 
                        and
                            ``(ii) as having been enrolled, during each 
                        of the months such individual is treated as an 
                        eligible individual solely by reason of clause 
                        (i), in the same high deductible health plan in 
                        which the individual was enrolled for the last 
                        month of such taxable year.
                    ``(B) Failure to maintain high deductible health 
                plan coverage.--
                            ``(i) In general.--If, at any time during 
                        the testing period, the individual is not an 
                        eligible individual, then--
                                    ``(I) gross income of the 
                                individual for the taxable year in 
                                which occurs the first month in the 
                                testing period for which such 
                                individual is not an eligible 
                                individual is increased by the 
                                aggregate amount of all contributions 
                                to the health savings account of the 
                                individual which could not have been 
                                made but for subparagraph (A), and
                                    ``(II) the tax imposed by this 
                                chapter for any taxable year on the 
                                individual shall be increased by 10 
                                percent of the amount of such increase.
                            ``(ii) Exception for disability or death.--
                        Subclauses (I) and (II) of clause (i) shall not 
                        apply if the individual ceased to be an 
                        eligible individual by reason of the death of 
                        the individual or the individual becoming 
                        disabled (within the meaning of section 
                        72(m)(7)).
                            ``(iii) Testing period.--The term `testing 
                        period' means the period beginning with the 
                        last month of the taxable year referred to in 
                        subparagraph (A) and ending on the last day of 
                        the 12th month following such month.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 6. EXCEPTION TO REQUIREMENT FOR EMPLOYERS TO MAKE COMPARABLE 
              HEALTH SAVINGS ACCOUNT CONTRIBUTIONS.

    (a) In General.--Section 4980G of the Internal Revenue Code of 1986 
(relating to failure of employer to make comparable health savings 
account contributions) is amended by adding at the end the following 
new subsection:
    ``(d) Exception.--For purposes of applying section 4980E to a 
contribution to a health savings account of an employee who is not a 
highly compensated employee (as defined in section 414(q)), highly 
compensated employees shall not be treated as comparable participating 
employees.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2006.

SEC. 7. ONE-TIME DISTRIBUTION FROM INDIVIDUAL RETIREMENT PLANS TO FUND 
              HSAS.

    (a) In General.--Subsection (d) of section 408 of the Internal 
Revenue Code of 1986 (relating to taxability of beneficiary of 
employees' trust) is amended by adding at the end the following new 
paragraph:
            ``(9) Distribution for health savings account funding.--
                    ``(A) In general.--In the case of an individual who 
                is an eligible individual (as defined in section 
                223(c)) and who elects the application of this 
                paragraph for a taxable year, gross income of the 
                individual for the taxable year does not include a 
                qualified HSA funding distribution to the extent such 
                distribution is otherwise includible in gross income.
                    ``(B) Qualified hsa funding distribution.--For 
                purposes of this paragraph, the term `qualified HSA 
                funding distribution' means a distribution from an 
                individual retirement plan (other than a plan described 
                in subsection (k) or (p)) of the employee to the extent 
                that such distribution is contributed to the health 
                savings account of the individual in a direct trustee-
                to-trustee transfer.
                    ``(C) Limitations.--
                            ``(i) Maximum dollar limitation.--The 
                        amount excluded from gross income by 
                        subparagraph (A) shall not exceed the excess 
                        of--
                                    ``(I) the annual limitation under 
                                section 223(b) computed on the basis of 
                                the type of coverage under the high 
                                deductible health plan covering the 
                                individual at the time of the qualified 
                                HSA funding distribution, over
                                    ``(II) in the case of a 
                                distribution described in clause 
                                (ii)(II), the amount of the earlier 
                                qualified HSA funding distribution.
                            ``(ii) One-time transfer.--
                                    ``(I) In general.--Except as 
                                provided in subclause (II), an 
                                individual may make an election under 
                                subparagraph (A) only for one qualified 
                                HSA funding distribution during the 
                                lifetime of the individual. Such an 
                                election, once made, shall be 
                                irrevocable.
                                    ``(II) Conversion from self-only to 
                                family coverage.--If a qualified HSA 
                                funding distribution is made during a 
                                month in a taxable year during which an 
                                individual has self-only coverage under 
                                a high deductible health plan as of the 
                                first day of the month, the individual 
                                may elect to make an additional 
                                qualified HSA funding distribution 
                                during a subsequent month in such 
                                taxable year during which the 
                                individual has family coverage under a 
                                high deductible health plan as of the 
                                first day of the subsequent month.
                    ``(D) Failure to maintain high deductible health 
                plan coverage.--
                            ``(i) In general.--If, at any time during 
                        the testing period, the individual is not an 
                        eligible individual, then the aggregate amount 
                        of all contributions to the health savings 
                        account of the individual made under 
                        subparagraph (A)--
                                    ``(I) shall be includible in the 
                                gross income of the individual for the 
                                taxable year in which occurs the first 
                                month in the testing period for which 
                                such individual is not an eligible 
                                individual, and
                                    ``(II) the tax imposed by this 
                                chapter for any taxable year on the 
                                individual shall be increased by 10 
                                percent of the amount which is so 
                                includible.
                            ``(ii) Exception for disability or death.--
                        Subclauses (I) and (II) of clause (i) shall not 
                        apply if the individual ceased to be an 
                        eligible individual by reason of the death of 
                        the individual or the individual becoming 
                        disabled (within the meaning of section 
                        72(m)(7)).
                            ``(iii) Testing period.--The term `testing 
                        period' means the period beginning with the 
                        month in which the qualified HSA funding 
                        distribution is contributed to a health savings 
                        account and ending on the last day of the 12th 
                        month following such month.
                    ``(E) Application of section 72.--Notwithstanding 
                section 72, in determining the extent to which an 
                amount is treated as otherwise includible in gross 
                income for purposes of subparagraph (A), the aggregate 
                amount distributed from an individual retirement plan 
                shall be treated as includible in gross income to the 
                extent that such amount does not exceed the aggregate 
                amount which would have been so includible if all 
                amounts from all individual retirement plans were 
                distributed. Proper adjustments shall be made in 
                applying section 72 to other distributions in such 
                taxable year and subsequent taxable years.''.
    (b) Coordination With Limitation on Contributions to HSAs.--Section 
223(b)(4) of such Code (relating to coordination with other 
contributions) is amended by striking ``and'' at the end of 
subparagraph (A), by striking the period at the end of subparagraph (B) 
and inserting ``, and'', and by inserting after subparagraph (B) the 
following new subparagraph:
                    ``(C) the aggregate amount contributed to health 
                savings accounts of such individual for such taxable 
                year under section 408(d)(9) (and such amount shall not 
                be allowed as a deduction under subsection (a)).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.
Output: Health Opportunity Patient Empowerment Act of 2006 - Amends Internal Revenue Code provisions relating to high deductible health plans and health savings accounts (HSAs).

(Sec. 2) Allows a one-time distribution of amounts in a health flexible spending arrangement or a health reimbursement arrangement to an HSA if such distribution takes place before January 1, 2012. Requires distribution amounts to be included in the gross income of any individual (except a deceased or disabled individual) who fails to maintain coverage in a high deductible health plan and imposes an additional 10% penalty tax on such amounts.

Allows certain coverage under a flexible spending arrangement for taxable years after December 31, 2006, to be disregarded for purposes of determining eligibility for high deductible health plan coverage.

(Sec. 3) Repeals the deductible limitations on tax deductions for contributions to HSAs.

(Sec. 4) Requires inflation adjustments to HSA contribution and deductible amounts to be determined at the end of the 12-month period ending on March 31 (currently, August 31). Requires the Secretary of the Treasury to publish inflation adjustments for HSA contribution and deductible amounts by June 1 of each year.

(Sec. 5) Allows individuals who establish an HSA after the beginning of a taxable year to make contributions up to the full annual limit.

(Sec. 6) Permits employers to make higher contributions to the HSAs of employees who are not highly compensated.

(Sec. 7) Allows a one-time tax-free distribution of individual retirement account (IRA) funds to an HSA. Requires distribution amounts to be included in the gross income of any individual (except a deceased or disabled individual) who fails to maintain coverage in a high deductible health plan and imposes an additional 10% penalty tax on such amounts.