An Act to Establish and Permit Medical Savings Accounts
Maine Legislature, Session 121, LD 0256
Committee: Taxation
Sponsors: CRESSEY, MAYO, DUPREY, GLYNN, MARRACI-IE, SHIELDS, SNOWE-MELLO, VAUGHAN, YOUNG, WOODCOCK
Amends: 36 MRSA §5122, 36 MRSA §5164, 36 MRSA §5200-A

Legislative Document 
No. 256 
H.P.211 
House of Representatives, January 23, 2003 
An Act to Establish and Permit Medical Savings Accounts 
Reference to the Committee on Taxation suggested and ordered printed. 
Presented by Representative CRESSEY of Baldwin. 
Cosponsored by Senator MAYO of Sagadahoc and 
7ll~111.7l1~ 
MILLICE~Pf M. MacFARLAND 
Clerk 
Representatives: DUPREY of Hampden, GLYNN of South Portland, MARRACI-IE of 
Waterville, SHIELDS of Auburn, SNOWE-MELLO of Poland, VAUGHAN of Durham, 
YOUNG of Limestone, Senator: WOODCOCK of Franklin. 
Printed on recycled paper 
Be it enacted by the People of the State of Maine as follows: 
Sec. 1. 36 MRS A §5122. sub-§l. ,,0 and P, as enacted by PL 
2001, c. 700, §4 and affected by §10, are amended to read: 
O. 
The 
amount 
of 
the 
contribution 
to 
a 
qualified 
scholarship organization that is included in the credit base 
of the educational attainment investment tax credit under 
section 5219-U to the extent that the contribution has been 
used to adjust federal adjusted gross income; aBa 
P. 
The amount of the loan repayment included in the credit 
base of the recruitment credit under section 5219-V to the 
extent that the repayment has been used to adjust federal 
adjusted gross incomeT; and 
Sec. 2. 36 MRSA §5122, sub-§I"Q is enacted to read: 
o. 
Amounts withdrawn pursuant to section 6603, subsection 3 
by the taxpayer during the taxable year from an individual 
medical savings account established in the taxpayer's name. 
Sec. 3. 36 MRSA §5122. sub-§2, "R and S, as enacted by PL 
2001, c. 714, Pt. AA, §4, are amended to read: 
R. 
For tax years beginning in 2005, 2006 or 2007, an amount 
equal to 1/3 of any amount added back to federal adjusted 
gross income by the taxpayer for the 2003 tax year pursuant 
to subsection 1, paragraph N, except with respect to 3-year 
property, in which case this paragraph does not apply to 
2006 or 
2007 
tax years and the 
amount to be subtracted 
pursuant to this paragraph in the 2005 tax year is an amount 
equal to the amount added back pursuant to subsection 1, 
paragraph N for tax years beginning in 2003; aHa 
s. 
For tax years beginning in 2006, 2007 or 2008, an amount 
equal to 1/3 of any amount added back to federal adjusted 
gross income by the taxpayer for the 2004 tax year pursuant 
to subsection 1, paragraph N, except with respect to 3-year 
property, in which case this paragraph does not apply to 
2007 
or 
2008 
tax years and the 
amount to be subtracted 
pursuant to this paragraph in the 2006 tax year is in an 
amount equal to the amount added back pursuant to subsection 
1, paragraph N for tax years beginning in 2004T~ 
Sec. 4. 36 MRSA §5122, sub-§2. "T and U are enacted to read: 
T. 
Interest or dividends on obligations or securities of 
this State and its political subdivisions and authorities to 
the extent included in federal adjusted gross income: and 
U. 
Contributions 
or 
deposits 
to 
an 
individual 
medical 
savings account established under chapter 914 subject to the 
following limitations. 
(1) 
The taxpayer may subtract: 
( a) 
The 
taxpayer's 
taxpayer's 
the extent 
amount 
of 
contributions 
made 
by 
the 
employer during the taxable year to the 
indi vidual medical savings account to 
that the employer contributions are 
included in the taxpayer's federal adjusted gross 
income: and 
(b) 
The amount deposited by the taxpayer in the 
account during the taxable year. 
(2) 
The taxpayer's employer may subtract the amount of 
contributions made by the employer to an individual 
medical savings account established on the taxpayer's 
behalf to the extent that the contributions are not 
deductible under the Code. 
Sec. 5. 36 MRSA §5164. sub-~ 1, as amended by PL 1999, c. 708, 
§38, is further amended to read: 
1. 
Fiduciary adjustment defined. The fiduciary adjustment 
is the net amount of the modifications described in section 5122, 
including subsection 3 if the estate or trust is a beneficiary of 
another estate or trust, wa~ea that relates to items of income or 
deduction of an estate or trust. 
Income taxes imposed by this 
State or any other taxing jurisdiction and interest or expenses 
incurred in the production of income exempt from tax under this 
Part deducted in arriving at federal taxable income must be added 
back to the fiduciary adjustment. 
Interest or expenses incurred 
in the production of income taxable under this Part but exempt 
from federal income tax must be subtracted from the fiduciary 
adjustment. 
Interest income earned on 
a trust that is established as 
an 
individual medical savings account pursuant to chapter 914 is not 
included 
as 
income 
if 
the 
interest 
income 
is 
received 
on 
obligations of a state, territory or possession of the United 
States or 
a 
political subdivision of 
a 
state, 
territory or 
possession that is located outside of this State. 
Interest 
earned by a trust that is established as an individual medical 
savings account may be subtracted from the adjusted gross income 
to the extent that the income is included in the trust's Maine 
gross income during the taxable year. 
Sec. 6. 36 MRS A §5200-A, sub-§2, "N and 0, as enacted by PL 
2001, c. 714, Pt. AA, §7, are amended to read: 
N. 
For tax years beginning in 2005, 2006 or 2007, an amount 
equal to 1/3 of any amount added back to federal taxable 
income by the taxpayer for the 2003 tax year pursuant to 
subsection 1, paragraph N, 
except with respect to 
-year 
property, in which case this paragraph does not apply to 
2006 or 
2007 
tax years 
and the amount to be subtracted 
pursuant to this paragraph in the 2005 tax year is an amount 
equal to the amount added back pursuant to subsection 1, 
paragraph N; aBa 
O. 
For tax years beginning in 2006, 2007 or 2008, an amount 
equal to 1/3 of any amount added back to federal taxable 
income by the taxpayer for the 2004 tax year pursuant to 
subsection 1, paragraph N, 
except with respect to 3-year 
property, in which case this paragraph does not apply to 
2007 
or 2008 
tax years 
and the amount to be subtracted 
pursuant to this paragraph in the 2006 tax year is an amount 
equal to the amount added back pursuant to subsection 1, 
paragraph NT; and 
Sec. 7. 36 MRSA §5200-A. sub-§2.,P is enacted to read: 
P. 
The amount of contributions made by the taxpayer during 
the 
taxable year 
to individual medical 
savings 
accounts 
established on behalf of the taxpayer's employees pursuant 
to chapter 914 to the extent that the contributions are not 
deductible under the Code. 
Sec. 8. 36 MRS A c. 914 is enacted to read: 
CHAPTER 914 
INDIVIDUAL MEDICAL SAVINGS ACCOUNT ACT 
§6601. Short title 
This chapter may be 
known 
and cited as 
"the Individual 
Medical Savings Account Act. " 
§6602. 
Definitions 
As 
used 
in this 
chapter, 
unless 
the 
context 
otherwise 
indicates, the following terms have the following meanings. 
1. Account administrator. 
"Account administrator" means: 
A. 
A financial institution authorized to do business in 
this State as defined in Title 9-B, section 131, subsection 
B. 
An insurance company authorized to do business in this 
State pursuant to Title 24-A; 
C. 
A nonprofit hospital or medical service organization 
authorized to do business in this State pursuant to Title 
24; or 
D. 
An employer, if the employer has a self-insured health 
plan that meets the requirements of the federal Employee 
Retirement Income Security Act of 1974, 
United States 
Code, Sections 1001 to 1461, as amended. 
2. 
Account holder. 
"Account holder" means an individual on 
whose behalf an individual medical savings account is established. 
3. Eligible medical expenses. 
"Eligible medical expenses" 
means expenses paid by or on behalf of an account holder for 
medical care that are described in the Code, 
Section 213(d). 
"Eligible medical expenses" includes health insurance premiums 
and deductibles. 
4. 
Household. 
"Household" 
means 
the 
taxpayer, 
the 
taxpayer's spouse and any member of the taxpayer's household for 
whom 
the 
taxpayer 
is entitled to 
claim 
an 
exemption 
as 
a 
dependent under Part 8. 
5. 
Individual medical savings account. 
"Individual medical 
savings account" or "account" means a trust created or organized 
to pay eligible medical expenses. 
§6603. 
Establishment and procedures 
Individual 
medical 
savings 
accounts 
may 
be 
established 
subject to the following procedures. 
1. 
Health 
insurance 
coverage. 
Before 
establishing 
a~ 
individual 
medical 
savings 
account, 
the 
prospective 
account 
holder must obtain or have health insurance coverage. 
2. 
Account 
establishment. 
A resident 
may 
establish 
an 
individual medical savings account for taxable years beginning 
after December 31, 2003. 
The account must be established as a 
trust under the laws of this State and must be placed with an 
account administrator. 
At the time of establishment, the account 
administrator 
shall 
notify 
the 
account 
holder 
of 
potential 
federal 
income tax liability that may be associated wi th the 
account. 
3. 
Pa~nt of eligible medical 
expenses. 
The 
account 
administrator may use the funds 
in an account solely to pay 
eligible medical expenses of the account holder and members of 
the account holder's household that are not otherwise covered 
under the account holder's existing medical coverage. Funds held 
in an account may not be used to cover medical expenses of the 
account holder or members of the account holder's household that 
are otherwise covered, 
including, but not limited to, medical 
expenses covered pursuant to an automobile insurance policy, 
a 
workers' 
compensation insurance policy or a self-insured plan. 
If the account holder submits appropriate documentation to the 
account administrator, 
the account administrator may reimburse 
the 
account 
holder 
from 
account 
funds 
for 
eligible medical 
expenses paid directly by the account holder during the taxable 
year. 
4. 
Withdrawals for other purposes. 
The account holder may 
wi thdraw funds 
from the account for purposes other than those 
expenses allowed under subsection 3 on the last business day of 
the calendar year without incurring a withdrawal penalty. 
If an 
account holder withdraws funds at any other time, other than for 
those purposes allowed under subsection 
( 
the account holder 
must pay a penalty equal to 10c" of the amount withdrawn. 
The 
penalty must be paid to the Bureau of Revenue Services at the 
time the account holder files an income tax return under this 
Ti tIe for the taxable year in which the funds were withdrawn. 
The State Tax Assessor shall credit all penalties received to the 
General Fund. 
5. 
Employer accounts. 
Upon agreement between an employer 
and an employee, an employer may: 
A. 
Contribute to the employee's individual medical savings 
account; 
B. 
Make or continue to make contributions to the employee's 
medical coverage; or 
C. 
Contribute to both the employee's individual medical 
savings account and the employee's medical coverage. 
6. 
No limit. 
In each taxable year, there is no limit to 
the total deposits that may be made to an account by or on behalf 
of an account holder. 
1. 
Death of account holder. 
Upon the death of an account 
holder, the account administrator shall distribute the principal 
and 
accumulated 
interest 
of 
the 
individual 
medical 
savings 
account to the estate of the account holder. 
8. 
Tax consequences. 
Any amount deposited into an account 
established under this chapter may be subtracted from taxable 
income of the account holder during the same tax year. 
Funds 
wi thdrawn pursuant to subsection 4 must be considered income to 
the account holder for the purpose of computing adjusted gross 
income. 
SUMMARY 
This bill allows residents of the State to establish medical 
savings 
accounts 
for 
payment 
of eligible medical 
expenses, 
including 
the 
payment 
of 
health 
insurance 
premiums 
and 
deductibles. Contributions to, interest earned on and qualified 
wi thdrawals from medical savings accounts are exempt from Maine 
state income tax.