An Act To Establish Individual Medical Savings Accounts
Maine Legislature, Session 122, LD 0507
Committee: Taxation
Sponsors: McKANE, McCORMICK, COURTNEY, CLOUGH, FISCHER, GLYNN, LINDELL, MERRILL, RICHARDSON, DOW
Amends: 36 MRSA §5122, 36 MRSA §5164, 36 MRSA §5200-A

Legislative Document 
No. 507 
H.P.382 
House of Representatives, February 1,2005 
An Act To Establish Individual Medical Savings Accounts 
Reference to the Committee on Taxation suggested and ordered printed. 
Presented by Representative McKANE of Newcastle. 
/J1~ 
1I7.77!d£~ 
MILLICENT M. MacFARLAND 
Clerk 
Cosponsored by Representative McCORMICK of West Gardiner, Senator COURTNEY of 
York and Representatives: CLOUGH of Scarborough, FISCHER of Presque Isle, GLYNN of 
South Portland, LINDELL of Frankfort, MERRILL of Appleton, RICHARDSON of Warren, 
V AUGHAN of Durham, Senator: DOW of Lincoln. 
Printed on recycled paper 
Be it enacted by the People of the State of Maine as follows: 
Sec. 1. 36 MRSA §5122, sub-§l, <J[V, as amended by PL 2003, c. 
705, §8, is further amended to read: 
V. 
For tax years beginning on or after January 1, 2003 and 
before January 1, 2006, the amount claimed as a federal 
income adjustment for student loan interest under the Code, 
Section 62 (a)( 17), but only for interest paid after 60 
months from the start of the loan repayment period; aBa 
Sec. 2. 36 MRS A §5122, sub-§l, <J[W, as enacted by PL 2003, c. 
705, §9, is amended to read: 
W. 
For tax years beginning on or after January 1, 2004, for 
an eligible individual as defined by the Code, Section 223 
(c)(l), 
the 
amount 
of 
contributions 
to 
the 
eligible 
individual's health savings account under the Code, Sections 
and 
to 
the 
extent that those 
contributions, 
exclusive 
of 
rollovers, 
for 
the 
taxable 
year 
are 
not 
included in the eligible individual's federal adjusted gross 
income..-; and 
Sec. 3. 36 MRSA §5122, sub-§l, <J[X is enacted to read: 
x. 
Amounts withdrawn pursuant to section 7153, subsection 4 
by the taxpayer during the taxable year from an individual 
medical savings account established in the taxpayer's name. 
Sec. 4. 36 MRSA §5122, sub-§2, <J[Q, as corrected by RR 2003, c. 
1, §38, is amended to read: 
Q. 
A fraction of any amount previously added back by the 
taxpayer 
to 
federal 
adjusted 
gross 
income 
pursuant 
to 
subsection 1, paragraph N. 
(1) 
With respect to property first placed in service 
during taxable years beginning in 2002, the adjustment 
under this paragraph is available for each year during 
the 
recovery 
period, 
beginning 
years 
after 
the 
beginning of the taxable year during which the property 
was first placed in service. 
The fraction is equal to 
the amount added back under subsection 1, paragraph N 
with respect to the property, divided by the number of 
years in the recovery period minus 2. 
(2) 
Wi th respect to all other property, for the 
taxable year 
immediately following the taxable year 
during which the property was first placed in service, 
the fraction allowed by this paragraph is equal to 5% 
Page l-LR05l9(1) 
of the amount added back under subsection I, paragraph 
N with respect to the property. 
For each subsequent 
taxable year during the recovery period, the fraction 
is 
equal 
to 
95% 
of 
the 
amount 
added 
back 
under 
subsection I, paragraph N with respect to the property, 
divided by the number of years in the recovery period 
minus 2. 
In the case of property expensed pursuant to Section 179 of 
the Code, 
the term "recovery period" means the recovery 
period that would have been applicable to the property had 
Section 179 not been applied; aBa 
Sec. 5. 36 MRSA §5122, sub-§2, 1T, as amended by PL 2003, c. 
705, §12 and affected by §14, is further amended to read: 
T. 
For income tax years beginning on or after January I, 
2002 and before January I, 2004, 
an amount equal to the 
total premiums spent for long-term care insurance policies 
certified under Title 24-A, section 5075-A as long as the 
amount subtracted is reduced by the long-term care premiums 
claimed as an itemized deduction pursuant to section 5125. 
For income tax years beginning on or after January I, 2004, 
an amount equal to the total premiums spent for qualified 
long-term care insurance contracts certified under Title 
24-A, section 5075-A, as long as the amount subtracted is 
reduced by any amount claimed as a deduction for federal 
income tax purposes in accordance with the Code, Section 
(1) 
and by the long-term care premiums claimed as an 
itemized deduction pursuant to section 5125T; and 
Sec. 6. 36 MRS A §5122, sub-§2, 1V is enacted to read: 
U. 
Contributions or deposits 
to 
an individual medical 
savings account. establishE!d· under chapter 923 subject to the 
following limitations. 
(1) 
The taxpayer may subtract: 
(a) 
The 
amount 
of contributions made 
by the 
taxpayer's employer during the taxable year to the 
taxpayer's individual medical savings account to 
the extent 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. 7. 36 MRSA §5164, sub-§l, 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, wRieR 
Fela~es that relate 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 923 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 interest income is included in the trust's 
Maine gross income during the taxable year. 
Sec. 8. 36 MRSA §5200-A, sob-§2, <JIL, as amended by PL 2003, c. 
20, Pt. EE, §3, is further amended to read: 
L. 
An amount ,e.qua1 to the absolute value of any net 
operating l~ 
arising from a tax year beqinning or ending 
in 2001 for which federal taxable income vas ~reased under 
subsection 1, paragraph M and that, pursuant t~ection 102 
of the federal Job Creation and Worker Assistanc~ Act of 
2002, Public Law 107-147, was carried back more tharl. 2 years 
to the taxable year for federal income tax purposes,'~ut 
only to the extent that: 
(1) Maine taxable income is not reduced below zero; 
(2) The taxable year is either within 2 years prior to 
the year in which the loss arose or within the 
by 
allowable 
federal 
period 
for 
carry-over 
of 
net 
operating losses; and 
(3) 
The 
amount has not been previously used as 
a 
modification pursuant to this subsection; aBa 
Sec. 9. 36 MRS A §S200-A, sub-§2, 1M, as repealed and replaced 
PL 2003, c. 479, §6, is amended to read: 
M. 
A fraction of any amount previously added back by the 
taxpayer to federal taxable income pursuant to subsection 1, 
paragraph N. 
(1) 
With respect to property first placed in service 
during taxable years beginning in 2002, the adjustment 
under this paragraph is available for each year during 
the 
recovery period, 
beginning 
years after the 
beginning of the taxable year during which the property 
was first placed in service. 
The fraction is equal to 
the amount added back under subsection 1, paragraph N 
with respect to the property, divided by the number of 
years in the recovery period minus 2. 
(2) 
With 
respect to all other property, 
for 
the 
taxable year immediately following the taxable year 
during which the property was first placed in service, 
the fraction allowed by this paragraph is equal to 5% 
of the amount added back under subsection 1, paragraph 
N with respect to the property. 
For each subsequent 
taxable year during the recovery period, the fraction 
is equal 
to 
95% 
of 
the 
amount 
added back 
under 
subsection 1, paragraph N with respect to the property, 
divided by the number of years in the recovery period 
minus 2. 
In the case of property expensed pursuant to Section 179 of 
the Code, the term "recovery period" means the recovery 
period that would have been applicable to the property had 
Section 179 not been appliedT: and 
Sec. 10. 36 MRSA §S200-A, sub-§2, 1P 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 923 to the extent that the contributions are not 
deductible under the Code. 
Sec. 11. 36 MRSA c. 923 is enacted to read: 
CHAPTER 923 
INDIVIDUAL MEDICAL SAVINGS ACCOUNT ACT 
§7151. Short title 
This chapter may be known and cited as "the Individual 
Medical Savings Account Act." 
§7152. 
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 
17-11.; 
B. 
An insurance company authorized to do business in this 
State pursuant to Title 24-11.; 
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 elq)enses. 
"Eligible medical expenses" 
means expenses paid by or on behalf of an account holder for 
medical care that is described in the Code, 
Section 2l3(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. 
§1l53. 
Establishment and procedures 
Individual medical savings accounts may be established 
according to this section. 
1. 
Health insurance coverage. 
Before establishing an 
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, 2005. 
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 with the 
account. 
3. 
Payment 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 
withdraw 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 3, the account holder 
must pay a penalty equal to 10% of the amount withdrawn. 
The 
penalty must be paid to the bureau at the time the account holder 
files an income tax return under this Title 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. 
Limit. 
In each taxable year, there is a $20,000 limit 
on the total deposits that may be made to an account by or on 
behalf of an account holder. 
7. 
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 up to the 
limi t established in subsection 6. 
Funds withdrawn 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 
individual 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 withdrawals 
from 
individual 
medical 
savings 
accounts are exempt from Maine state income tax up to $20,000 per 
tax year.