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Q: 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.
A:
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.