SEC. 301. MEDICAL SAVINGS ACCOUNTS.
Title[ Title III\Subtitle A Contents
Subtitle A--Medical Savings Accounts
(a) In General.--Part VII of subchapter B of chapter 1 (relating to
additional itemized deductions for individuals) is amended by
redesignating section 220 as section 221 and by inserting after section
219 the following new section:
``SEC. 220. MEDICAL SAVINGS ACCOUNTS.
(a) Deduction Allowed.--In the case of an individual who is an
eligible individual for any month during the taxable year, there shall
be allowed as a deduction for the taxable year an amount equal to the
aggregate amount paid in cash during such taxable year by such
individual to a medical savings account of such individual.
``(b) Limitations.--
``(1) In general.--The amount allowable as a deduction under
subsection (a) to an individual for the taxable year shall not
exceed the sum of the monthly limitations for months during such
taxable year that the individual is an eligible individual.
``(2) Monthly limitation.--The monthly limitation for any
month is the amount equal to \1/12\ of--
``(A) in the case of an individual who has self-only
coverage under the high deductible health plan as of the
first day of such month, 65 percent of the annual
deductible under such coverage, and
``(B) in the case of an individual who has family
coverage under the high deductible health plan as of the
first day of such month, 75 percent of the annual
deductible under such coverage.
``(3) Special rule for married individuals.--In the case of
individuals who are married to each other, if either spouse has
family coverage--
``(A) both spouses shall be treated as having only
such family coverage (and if such spouses each have
family coverage under different plans, as having the
family coverage with the lowest annual deductible), and
``(B) the limitation under paragraph (1) (after the
application of subparagraph (A) of this paragraph) shall
be divided equally between them unless they agree on a
different division.
``(4) Deduction not to exceed compensation.--
``(A) Employees.--The deduction allowed under
subsection (a) for contributions as an eligible
individual described in subclause (I) of subsection
(c)(1)(A)(iii) shall not exceed such individual's wages,
salaries, tips, and other employee compensation which
are attributable to such individual's employment by the
employer referred to in such subclause.
``(B) Self-employed individuals.--The deduction
allowed under subsection (a) for contributions as an
eligible individual described in subclause (II) of
subsection (c)(1)(A)(iii) shall not exceed such
individual's earned income (as defined in section
401(c)(1)) derived by the taxpayer from the trade or
business with respect to which the high deductible
health plan is established.
``(C) Community property laws not to apply.--The
limitations under this paragraph shall be determined
without regard to community property laws.
``(5) Coordination with exclusion for employer
contributions.--No deduction shall be allowed under this section
for any amount paid for any taxable year to a medical savings
account of an individual if--
``(A) any amount is contributed to any medical
savings account of such individual for such year which
is excludable from gross income under section 106(b), or
``(B) if such individual's spouse is covered under
the high deductible health plan covering such
individual, any amount is contributed for such year to
any medical savings account of such spouse which is so
excludable.
``(6) Denial of deduction to dependents.--No deduction shall
be allowed under this section to any individual with respect to
whom a deduction under section 151 is allowable to another
taxpayer for a taxable year beginning in the calendar year in
which such individual's taxable year begins.
``(c) Definitions.--For purposes of this section--
``(1) Eligible individual.--
``(A) In general.--The term `eligible individual'
means, with respect to any month, any individual if--
``(i) such individual is covered under a high
deductible health plan as of the 1st day of such
month,
``(ii) such individual is not, while covered
under a high deductible health plan, covered under
any health plan--
``(I) which is not a high deductible
health plan, and
``(II) which provides coverage for
any benefit which is covered under the
high deductible health plan, and
``(iii)(I) the high deductible health plan
covering such individual is established and
maintained by
the employer of such individual or of the spouse
of such individual and such employer is a small
employer, or
``(II) such individual is an employee (within
the meaning of section 401(c)(1)) or the spouse of
such an employee and the high deductible health
plan covering such individual is not established
or maintained by any employer of such individual
or spouse.
``(B) Certain coverage disregarded.--Subparagraph
(A)(ii) shall be applied without regard to--
``(i) coverage for any benefit provided by
permitted insurance, and
``(ii) coverage (whether through insurance or
otherwise) for accidents, disability, dental care,
vision care, or long-term care.
``(C) Continued eligibility of employee and spouse
establishing medical savings accounts.--If, while an
employer is a small employer--
``(i) any amount is contributed to a medical
savings account of an individual who is an
employee of such employer or the spouse of such an
employee, and
``(ii) such amount is excludable from gross
income under section 106(b) or allowable as a
deduction under this section,
such individual shall not cease to meet the requirement
of subparagraph (A)(iii)(I) by reason of such employer
ceasing to be a small employer so long as such employee
continues to be an employee of such employer.
``(D) Limitations on eligibility.--
``For limitations on number of taxpayers who are
eligible to have medical savings accounts, see
subsection (i).
``(2) High deductible health plan.--
``(A) In general.--The term `high deductible health
plan' means a health plan--
``(i) in the case of self-only coverage, which
has an annual deductible which is not less than
$1,500 and not more than $2,250,
``(ii) in the case of family coverage, which
has an annual deductible which is not less than
$3,000 and not more than $4,500, and
``(iii) the annual out-of-pocket expenses
required to be paid under the plan (other than for
premiums) for covered benefits does not exceed--
``(I) $3,000 for self-only coverage,
and
``(II) $5,500 for family coverage.
``(B) Special rules.--
``(i) Exclusion of certain plans.--Such term
does not include a health plan if substantially
all of its coverage is coverage described in
paragraph (1)(B).
``(ii) Safe harbor for absence of preventive
care deductible.--A plan shall not fail to be
treated as a high deductible health plan by reason
of failing to have a deductible for preventive
care if the absence of a deductible for such care
is required by State law.
``(3) Permitted insurance.--The term `permitted insurance'
means--
``(A) Medicare supplemental insurance,
``(B) insurance if substantially all of the coverage
provided under such insurance relates to--
``(i) liabilities incurred under workers'
compensation laws,
``(ii) tort liabilities,
``(iii) liabilities relating to ownership or
use of property, or
``(iv) such other similar liabilities as the
Secretary may specify by regulations,
``(C) insurance for a specified disease or illness,
and
``(D) insurance paying a fixed amount per day (or
other period) of hospitalization.
``(4) Small employer.--
``(A) In general.--The term `small employer' means,
with respect to any calendar year, any employer if such
employer employed an average of 50 or fewer employees on
business days during either of the 2 preceding calendar
years. For purposes of the preceding sentence, a
preceding calendar year may be taken into account only
if the employer was in existence throughout such year.
``(B) Employers not in existence in preceding
year.--In the case of an employer which was not in
existence throughout the 1st preceding calendar year,
the determination under subparagraph (A) shall be based
on the average number of employees that it is reasonably
expected such employer will employ on business days in
the current calendar year.
``(C) Certain growing employers retain treatment as
small employer.--The term `small employer' includes,
with respect to any calendar year, any employer if--
``(i) such employer met the requirement of
subparagraph (A) (determined without regard to
subparagraph (B)) for any preceding calendar year
after 1996,
``(ii) any amount was contributed to the
medical savings account of any employee of such
employer with respect to coverage of such employee
under a high deductible health plan of such
employer during such preceding calendar year and
such amount was excludable from gross income under
section 106(b) or allowable as a deduction under
this section, and
``(iii) such employer employed an average of
200 or fewer employees on business days during
each preceding calendar year after 1996.
``(D) Special rules.--
``(i) Controlled groups.--For purposes of this
paragraph, all persons treated as a single
employer under subsection (b), (c), (m), or (o) of
section 414 shall be treated as 1 employer.
``(ii) Predecessors.--Any reference in this
paragraph to an employer shall include a reference
to any predecessor of such employer.
``(5) Family coverage.--The term `family coverage'
means any coverage other than self-only coverage.
``(d) Medical Savings Account.--For purposes of this
section--
``(1) Medical savings account.--The term `medical savings
account' means a trust created or organized in the United States
exclusively for the purpose of paying the qualified medical
expenses of the account holder, but only if the written
governing instrument creating the trust meets the following
requirements:
``(A) Except in the case of a rollover contribution
described in subsection (f)(5), no contribution will be
accepted--
``(i) unless it is in cash, or
``(ii) to the extent such contribution, when
added to previous contributions to the trust for
the calendar year, exceeds 75 percent of the
highest annual limit deductible permitted under
subsection (c)(2)(A)(ii) for such calendar year.
``(B) The trustee is a bank (as defined in section
408(n)), an insurance company (as defined in section
816), or another person who demonstrates to the
satisfaction of the Secretary that the manner in which
such person will administer the trust will be consistent
with the requirements of this section.
``(C) No part of the trust assets will be invested
in life insurance contracts.
``(D) The assets of the trust will not be commingled
with other property except in a common trust fund or
common investment fund.
``(E) The interest of an individual in the balance
in his account is nonforfeitable.
``(2) Qualified medical expenses.--
``(A) In general.--The term `qualified medical
expenses' means, with respect to an account holder,
amounts paid by such holder for medical care (as defined
in section 213(d)) for such individual, the spouse of
such individual, and any dependent (as defined in
section 152) of such individual, but only to the extent
such amounts are not compensated for by insurance or
otherwise.
``(B) Health insurance may not be purchased from
account.--
``(i) In general.--Subparagraph (A) shall not
apply to any payment for insurance.
``(ii) Exceptions.--Clause (i) shall not apply
to any expense for coverage under--
``(I) a health plan during any
period of continuation coverage required
under any Federal law,
``(II) a qualified long-term care
insurance contract (as defined in
section 7702B(b)), or
``(III) a health plan during a
period in which the individual is
receiving unemployment compensation
under any Federal or State law.
``(C) Medical expenses of individuals who are not
eligible individuals.--Subparagraph (A) shall apply to
an amount paid by an account holder for medical care of
an individual who is not an eligible individual for the
month in which the expense for such care is incurred
only if no amount is contributed (other than a rollover
contribution) to any medical savings account of such
account holder for the taxable year which includes such
month. This subparagraph shall not apply to any expense
for coverage described in subclause (I) or (III) of
subparagraph (B)(ii).
``(3) Account holder.--The term `account holder' means the
individual on whose behalf the medical savings account was
established.
``(4) Certain rules to apply.--Rules similar to the
following rules shall apply for purposes of this section:
``(A) Section 219(d)(2) (relating to no deduction for rollovers).
``(B) Section 219(f)(3) (relating to time when contributions deemed made).
``(C) Except as provided in section 106(b), section 219(f)(5) (relating to employer payments).
``(D) Section 408(g) (relating to community property laws).
``(E) Section 408(h) (relating to custodial accounts).
``(e) Tax Treatment of Accounts.--
``(1) In general.--A medical savings account is exempt from
taxation under this subtitle unless such account has ceased to
be a medical savings account. Notwithstanding the preceding
sentence, any such account is subject to the taxes imposed by
section 511 (relating to imposition of tax on unrelated business
income of charitable, etc. organizations).
``(2) Account terminations.--Rules similar to the rules of
paragraphs (2) and (4) of section 408(e) shall apply to medical
savings accounts, and any amount treated as distributed under
such rules shall be treated as not used to pay qualified medical
expenses.
``(f) Tax Treatment of Distributions.--
``(1) Amounts used for qualified medical expenses.--Any
amount paid or distributed out of a medical savings account
which is used exclusively to pay qualified medical expenses of
any account holder shall not be includible in gross income.
``(2) Inclusion of amounts not used for qualified medical
expenses.--Any amount paid or distributed out of a medical
savings account which is not used exclusively to pay the
qualified medical expenses of the account holder shall be
included in the gross income of such holder.
``(3) Excess contributions returned before due date of
return.--
``(A) In general.--If any excess contribution is
contributed for a taxable year to any medical savings
account of an individual, paragraph (2) shall not apply
to distributions from the medical savings accounts of
such individual (to the extent such distributions do not
exceed the aggregate excess contributions to all such
accounts of such individual for such year) if--
``(i) such distribution is received by the
individual on or before the last day prescribed by
law (including extensions of time) for filing such
individual's return for such taxable year, and
``(ii) such distribution is accompanied by the
amount of net income attributable to such excess
contribution.
Any net income described in clause (ii) shall be
included in the gross income of the individual for the
taxable year in which it is received.
``(B) Excess contribution.--For purposes of
subparagraph (A), the term `excess contribution' means
any contribution (other than a rollover contribution)
which is neither excludable from gross income under
section 106(b) nor deductible under this section.
``(4) Additional tax on distributions not used for qualified
medical expenses.--
``(A) In general.--The tax imposed by this chapter
on the account holder for any taxable year in which
there is a payment or distribution from a medical
savings account of such holder which is includible in
gross income under paragraph (2) shall be increased by
15 percent of the amount which is so includible.
``(B) Exception for disability or death.--
Subparagraph (A) shall not apply if the payment or
distribution is made after the account holder becomes
disabled within the meaning of section 72(m)(7) or dies.
``(C) Exception for distributions after medicare
eligibility.--Subparagraph (A) shall not apply to any
payment or distribution after the date on which the
account holder attains the age specified in section 1811
of the Social Security Act.
``(5) Rollover contribution.--An amount is described in this
paragraph as a rollover contribution if it meets the
requirements of subparagraphs (A) and (B).
``(A) In general.--Paragraph (2) shall not apply to
any amount paid or distributed from a medical savings
account to the account holder to the extent the amount
received is paid into a medical savings account for the
benefit of such holder not later than the 60th day after
the day on which the holder receives the payment or
distribution.
``(B) Limitation.--This paragraph shall not apply to
any amount described in subparagraph (A) received by an
individual from a medical savings account if, at any
time during the 1-year period ending on the day of such
receipt, such individual received any other amount
described in subparagraph (A) from a medical savings
account which was not includible in the individual's
gross income because of the application of this
paragraph.
``(6) Coordination with medical expense deduction.--For
purposes of determining the amount of the deduction under
section 213, any payment or distribution out of a medical
savings account for qualified medical expenses shall not be
treated as an expense paid for medical care.
``(7) Transfer of account incident to divorce.--The transfer
of an individual's interest in a medical savings account to an
individual's spouse or former spouse under a divorce or
separation instrument described in subparagraph (A) of section
71(b)(2) shall not be considered a taxable transfer made by such
individual notwithstanding any other provision of this subtitle,
and such interest shall, after such transfer, be treated as a
medical savings account with respect to which such spouse is the
account holder.
``(8) Treatment after death of account holder.--
``(A) Treatment if designated beneficiary is
spouse.--If the account holder's surviving spouse
acquires such holder's interest in a medical savings
account by reason of being the designated beneficiary of
such account at the death of the account holder, such
medical savings account shall be treated as if the
spouse were the account holder.
``(B) Other cases.--
``(i) In general.--If, by reason of the death
of the account holder, any person acquires the
account holder's interest in a medical savings
account in a case to which subparagraph (A) does
not apply--
``(I) such account shall cease to be
a medical savings account as of the date
of death, and
``(II) an amount equal to the fair
market value of the assets in such
account on such date shall be includible
if such person is not the estate of such
holder, in such person's gross income
for the taxable year which includes such
date, or if such person is the estate of
such holder, in such holder's gross
income for the last taxable year of such
holder.
``(ii) Special rules.--
``(I) Reduction of inclusion for
pre-death expenses.--The amount
includible in gross income under clause
(i) by any person (other than the
estate) shall be reduced by the amount
of qualified medical expenses which were
incurred by the decedent before the date
of the decedent's death and paid by such
person within 1 year after such date.
``(II) Deduction for estate taxes.--
An appropriate deduction shall be
allowed under section 691(c) to any
person (other than the decedent or the
decedent's spouse) with respect to
amounts included in gross income under
clause (i) by such person.
``(g) Cost-of-Living Adjustment.--In the case of any taxable year
beginning in a calendar year after 1998, each dollar amount in
subsection (c)(2) shall be increased by an amount equal to--
``(1) such dollar amount, multiplied by
``(2) the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which such taxable year begins
by substituting `calendar year 1997' for `calendar year 1992' in
subparagraph (B) thereof.
If any increase under the preceding sentence is not a multiple of $50,
such increase shall be rounded to the nearest multiple of $50.
``(h) Reports.--The Secretary may require the trustee of a medical
savings account to make such reports regarding such account to the
Secretary and to the account holder with respect to contributions,
distributions, and such other matters as the Secretary determines
appropriate. The reports required by this subsection shall be filed at
such time and in such manner and furnished to such individuals at such
time and in such manner as may be required by the Secretary.
``(i) Limitation on Number of Taxpayers Having Medical Savings
Accounts.--
``(1) In general.--Except as provided in paragraph (5), no
individual shall be treated as an eligible individual for any
taxable year beginning after the cut-off year unless--
``(A) such individual was an active MSA participant
for any taxable year ending on or before the close of
the cut-off year, or
``(B) such individual first became an active MSA
participant for a taxable year ending after the cut-off
year by reason of coverage under a high deductible
health plan of an MSA-participating employer.
``(2) Cut-off year.--For purposes of paragraph (1), the term
`cut-off year' means the earlier of--
``(A) calendar year 2000, or
``(B) the first calendar year before 2000 for which
the Secretary determines under subsection (j) that the
numerical limitation for such year has been exceeded.
``(3) Active msa participant.--For purposes of this
subsection--
``(A) In general.--The term `active MSA participant'
means, with respect to any taxable year, any individual
who is the account holder of any medical savings account
into which any contribution was made which was
excludable from gross income under section 106(b), or
allowable as a deduction under this section, for such
taxable year.
``(B) Special rule for cut-off years before 2000.--
In the case of a cut-off year before 2000--
``(i) an individual shall not be treated as an
eligible individual for any month of such year or
an active MSA participant under paragraph (1)(A)
unless such individual is, on or before the cut-
off date, covered under a high deductible health
plan, and
``(ii) an employer shall not be treated as an
MSA-participating employer unless the employer, on
or before the cut-off date, offered coverage under
a high deductible health plan to any employee.
``(C) Cut-off date.--For purposes of subpara-
graph (B)--
``(i) In general.--Except as otherwise
provided in this subparagraph, the cut-off date is
October 1 of the cut-off year.
``(ii) Employees with enrollment periods after
october 1.--In the case of an individual described
in subclause (I) of subsection (c)(1)(A)(iii), if
the regularly scheduled enrollment period for
health plans of the individual's employer occurs
during the last 3 months of the cut-off year, the
cut-off date is December 31 of the cut-off year.
``(iii) Self-employed individuals.--In the
case of an individual described in subclause (II)
of subsection (c)(1)(A)(iii), the cut-off date is
November 1 of the cut-off year.
``(iv) Special rules for 1997.--If 1997 is a
cut-off year by reason of subsection (j)(1)(A)--
``(I) each of the cut-off dates
under clauses (i) and (iii) shall be 1
month earlier than the date determined
without regard to this clause, and
``(II) clause (ii) shall be applied
by substituting `4 months' for `3
months'.
``(4) MSA-participating employer.--For purposes of this
subsection, the term `MSA-participating employer' means any
small employer if--
``(A) such employer made any contribution to the
medical savings account of any employee during the cut-
off year or any preceding calendar year which was
excludable from gross income under section 106(b), or
``(B) at least 20 percent of the employees of such
employer who are eligible individuals for any month of
the cut-off year by reason of coverage under a high
deductible health plan of such employer each made a
contribution of at least $100 to their medical savings
accounts for any taxable year ending with or within the
cut-off year which was allowable as a deduction under
this section.
``(5) Additional eligibility after cut-off year.--If the
Secretary determines under subsection (j)(2)(A) that the
numerical limit for the calendar year following a cut-off year
described in paragraph (2)(B) has not been exceeded--
``(A) this subsection shall not apply to any
otherwise eligible individual who is covered under a
high deductible health plan during the first 6 months of
the second calendar year following the cut-off year (and
such individual shall be treated as an active MSA
participant for purposes of this subsection if a
contribution is made to any medical savings account with
respect to such coverage), and
``(B) any employer who offers coverage under a high
deductible health plan to any employee during such 6-
month period shall be treated as an MSA-participating
employer for purposes of this subsection if the
requirements of paragraph (4) are met with respect to
such coverage.
For purposes of this paragraph, subsection (j)(2)(A) shall be
applied for 1998 by substituting `750,000' for `600,000'.
``(j) Determination of Whether Numerical Limits Are Exceeded.--
``(1) Determination of whether limit exceeded for 1997.--The
numerical limitation for 1997 is exceeded if, based on the
reports required under paragraph (4), the number of medical
savings accounts established as of--
``(A) April 30, 1997, exceeds 375,000, or
``(B) June 30, 1997, exceeds 525,000.
``(2) Determination of whether limit exceeded for 1998 or
1999.--
``(A) In general.--The numerical limitation for 1998
or 1999 is exceeded if the sum of--
``(i) the number of MSA returns filed on or
before April 15 of such calendar year for taxable
years ending with or within the preceding calendar
year, plus
``(ii) the Secretary's estimate (determined on
the basis of the returns described in clause (i))
of the number of MSA returns for such taxable
years which will be filed after such date,
exceeds 600,000 (750,000 in the case of 1999). For
purposes of the preceding sentence, the term `MSA
return' means any return on which any exclusion is
claimed under section 106(b) or any deduction is claimed
under this section.
``(B) Alternative computation of limitation.--The
numerical limitation for 1998 or 1999 is also exceeded
if the sum of--
``(i) 90 percent of the sum determined under
subparagraph (A) for such calendar year, plus
``(ii) the product of 2.5 and the number of
medical savings accounts established during the
portion of such year preceding July 1 (based on
the reports required under paragraph (4)) for
taxable years beginning in such year,
exceeds 750,000.
``(3) Previously uninsured individuals not included in
determination.--
``(A) In general.--The determination of whether any
calendar year is a cut-off year shall be made by not
counting the medical savings account of any previously
uninsured individual.
``(B) Previously uninsured individual.--For purposes
of this subsection, the term `previously uninsured
individual' means, with respect to any medical savings
account, any individual who had no health plan coverage
(other than coverage referred to in subsection
(c)(1)(B)) at any time during the 6-month period before
the date such individual's coverage under the high
deductible health plan commences.
``(4) Reporting by msa trustees.--
``(A) In general.--Not later than August 1 of 1997,
1998, and 1999, each person who is the trustee of a
medical savings account established before July 1 of
such calendar year shall make a report to the Secretary
(in such form and manner as the Secretary shall specify)
which specifies--
``(i) the number of medical savings accounts
established before such July 1 (for taxable years
beginning in such calendar year) of which such
person is the trustee,
``(ii) the name and TIN of the account holder
of each such account, and
``(iii) the number of such accounts which are
accounts of previously uninsured individuals.
``(B) Additional report for 1997.--Not later than
June 1, 1997, each person who is the trustee of a
medical savings account established before May 1, 1997,
shall make an additional report described in
subparagraph (A) but only with respect to accounts
established before May 1, 1997.
``(C) Penalty for failure to file report.--The
penalty provided in section 6693(a) shall apply to any
report required by this paragraph, except that--
``(i) such section shall be applied by
substituting `$25' for `$50', and
``(ii) the maximum penalty imposed on any
trustee shall not exceed $5,000.
``(D) Aggregation of accounts.--To the extent
practicable, in determining the number of medical
savings accounts on the basis of the reports under this
paragraph, all medical savings accounts of an individual
shall be
treated as 1 account and all accounts of individuals who
are married to each other shall be treated as 1 account.
``(5) Date of making determinations.--Any determination
under this subsection that a calendar year is a cut-off year
shall be made by the Secretary and shall be published not later
than October 1 of such year.''.
(b) Deduction Allowed Whether or Not Individual
Itemizes Other Deductions.--Subsection (a) of section 62 is amended by
inserting after paragraph (15) the following new paragraph:
``(16) Medical savings accounts.--The deduction allowed by
section 220.''.
(c) Exclusions for Employer Contributions to Medical Savings
Accounts.--
(1) Exclusion from income tax.--The text of section 106
(relating to contributions by employer to accident and health
plans) is amended to read as follows:
``(a) General Rule.--Except as otherwise provided in this section,
gross income of an employee does not include employer-provided coverage
under an accident or health plan.
``(b) Contributions to Medical Savings Accounts.--
``(1) In general.--In the case of an employee who is an
eligible individual, amounts contributed by such employee's
employer to any medical savings account of such employee shall
be treated as employer-provided coverage for medical expenses
under an accident or health plan to the extent such amounts do
not exceed the limitation under section 220(b)(1) (determined
without regard to this subsection) which is applicable to such
employee for such taxable year.
``(2) No constructive receipt.--No amount shall be included
in the gross income of any employee solely because the employee
may choose between the contributions referred to in paragraph
(1) and employer contributions to another health plan of the
employer.
``(3) Special rule for deduction of employer
contributions.--Any employer contribution to a medical savings
account, if otherwise allowable as a deduction under this
chapter, shall be allowed only for the taxable year in which
paid.
``(4) Employer msa contributions required to be shown on
return.--Every individual required to file a return under
section 6012 for the taxable year shall include on such return
the aggregate amount contributed by employers to the medical
savings accounts of such individual or such individual's spouse
for such taxable year.
``(5) MSA contributions not part of cobra coverage.--
Paragraph (1) shall not apply for purposes of section 4980B.
``(6) Definitions.--For purposes of this subsection, the
terms `eligible individual' and `medical savings account' have
the respective meanings given to such terms by section 220.
``(7) Cross reference.--
``For penalty on failure by employer to make
comparable contributions to the medical savings accounts
of comparable employees, see section 4980E.''.
(2) Exclusion from employment taxes.--
(A) Railroad retirement tax.--Subsection (e) of
section 3231 is amended by adding at the end the
following new paragraph:
``(10) Medical savings account contributions.--The term
`compensation' shall not include any payment made to or for the
benefit of an employee if at the time of such payment it is
reasonable to believe that the employee will be able to exclude
such payment from income under section 106(b).''.
(B) Unemployment tax.--Subsection (b) of section
3306 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 following new paragraph:
``(17) any payment made to or for the benefit of an employee
if at the time of such payment it is reasonable to believe that
the employee will be able to exclude such payment from income
under section 106(b).''.
(C) Withholding tax.--Subsection (a) of section 3401
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) any payment made to or for the benefit of an employee
if at the time of such payment it is reasonable to believe that
the employee will be able to exclude such payment from income
under section 106(b).''
(3) Employer contributions required to be shown on w-2.--
Subsection (a) of section 6051 is amended by striking ``and'' at
the end of paragraph (9), by striking the period at the end of
paragraph (10) and inserting ``, and'', and by inserting after
paragraph (10) the following new paragraph:
``(11) the amount contributed to any medical savings account
(as defined in section 220(d)) of such employee or such
employee's spouse.''.
(4) Penalty for failure of employer to make comparable msa
contributions.--
(A) In general.--Chapter 43 is amended by adding
after section 4980D the following new section:
``SEC. 4980E. FAILURE OF EMPLOYER TO MAKE COMPARABLE MEDICAL SAVINGS ACCOUNT
CONTRIBUTIONS.
``(a) General Rule.--In the case of an employer who makes a
contribution to the medical savings account of any employee with respect
to coverage under a high deductible health plan of the employer during a
calendar year, there is hereby imposed a tax on the failure of such
employer to meet the requirements of subsection (d) for such calendar
year.
``(b) Amount of Tax.--The amount of the tax imposed by subsection
(a) on any failure for any calendar year is the amount equal to 35
percent of the aggregate amount contributed by the employer to medical
savings accounts of employees for taxable years of such employees ending
with or within such calendar year.
``(c) Waiver by Secretary.--In the case of a failure which is due to
reasonable cause and not to willful neglect, the Secretary may waive
part or all of the tax imposed by subsection (a) to the extent that the
payment of such tax would be excessive relative to the failure involved.
``(d) Employer Required To Make Comparable MSA Contributions for All
Participating Employees.--
``(1) In general.--An employer meets the requirements of
this subsection for any calendar year if the employer makes
available comparable contributions to the medical savings
accounts of all comparable participating employees for each
coverage period during such calendar year.
``(2) Comparable contributions.--
``(A) In general.--For purposes of paragraph (1),
the term `comparable contributions' means
contributions--
``(i) which are the same amount, or
``(ii) which are the same percentage of the
annual deductible limit under the high deductible
health plan covering the employees.
``(B) Part-year employees.--In the case of an
employee who is employed by the employer for only a
portion of the calendar year, a contribution to the
medical savings account of such employee shall be
treated as comparable if it is an amount which bears the
same ratio to the comparable amount (determined without
regard to this subparagraph) as such portion bears to
the entire calendar year.
``(3) Comparable participating employees.--For purposes of
paragraph (1), the term `comparable participating employees'
means all employees--
``(A) who are eligible individuals covered under any
high deductible health plan of the employer, and
``(B) who have the same category of coverage.
For purposes of subparagraph (B), the categories of coverage are
self-only and family coverage.
``(4) Part-time employees.--
``(A) In general.--Paragraph (3) shall be applied
separately with respect to part-time employees and other
employees.
``(B) Part-time employee.--For purposes of
subparagraph (A), the term `part-time employee' means
any employee who is customarily employed for fewer than
30 hours per week.
``(e) Controlled Groups.--For purposes of this section, all persons
treated as a single employer under subsection (b), (c), (m), or (o) of
section 414 shall be treated as 1 employer.
``(f) Definitions.--Terms used in this section which are also used
in section 220 have the respective meanings given such terms in section
220.''.
(B) Clerical amendment.--The table of sections for
chapter 43 is amended by adding after the item relating
to section 4980D the following new item:
``Sec. 4980E. Failure of employer to make comparable medical savings
account contributions.''.
(d) Medical Savings Account Contributions Not Available Under
Cafeteria Plans.--Subsection (f) of section 125 of such Code is amended
by inserting ``106(b),'' before ``117''.
(e) Tax on Excess Contributions.--Section 4973 (relating to tax on
excess contributions to individual retirement accounts, certain section
403(b) contracts, and certain individual retirement annuities) is
amended--
(1) by inserting ``medical savings accounts,'' after
``accounts,'' in the heading of such section,
(2) by striking ``or'' at the end of paragraph (1) of sub-
section (a),
(3) by redesignating paragraph (2) of subsection (a) as
paragraph (3) and by inserting after paragraph (1) the
following:
``(2) a medical savings account (within the meaning of
section 220(d)), or'', and
(4) by adding at the end the following new subsection:
``(d) Excess Contributions to Medical Savings Accounts.--For
purposes of this section, in the case of medical savings accounts
(within the meaning of section 220(d)), the term `excess contributions'
means the sum of--
``(1) the aggregate amount contributed for the taxable year
to the accounts (other than rollover contributions described in
section 220(f)(5)) which is neither excludable from gross income
under section 106(b) nor allowable as a deduction under section
220 for such year, and
``(2) the amount determined under this subsection for the
preceding taxable year, reduced by the sum of--
``(A) the distributions out of the accounts which
were included in gross income under section 220(f)(2),
and
``(B) the excess (if any) of--
``(i) the maximum amount allowable as a
deduction under section 220(b)(1) (determined
without regard to section 106(b)) for the taxable
year, over
``(ii) the amount contributed to the accounts
for the taxable year.
For purposes of this subsection, any contribution which is distributed
out of the medical savings account in a distribution to which section
220(f)(3) applies shall be treated as an amount not contributed.''.
(f) Tax on Prohibited Transactions.--
(1) Section 4975 (relating to tax on prohibited
transactions) is amended by adding at the end of subsection (c)
the following new paragraph:
``(4) Special rule for medical savings accounts.--An
individual for whose benefit a medical savings account (within
the meaning of section 220(d)) 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 respect to such
transaction, the account ceases to be a medical savings account
by reason of the application of section 220(e)(2) to such
account.''.
(2) Paragraph (1) of section 4975(e) is amended to read as
follows:
``(1) Plan.--For purposes of this section, the term `plan'
means--
``(A) a trust described in section 401(a) which
forms a part of a plan, or a plan described in section
403(a), which trust or plan is exempt from tax under
section 501(a),
``(B) an individual retirement account described in
section 408(a),
``(C) an individual retirement annuity described in
section 408(b),
``(D) a medical savings account described in section
220(d), or
``(E) a trust, plan, account, or annuity which, at
any time, has been determined by the Secretary to be
described in any preceding subparagraph of this
paragraph.''.
(g) Failure To Provide Reports on Medical Savings Accounts.--
(1) Subsection (a) of section 6693 (relating to failure to
provide reports on individual retirement accounts or annuities)
is amended to read as follows:
``(a) Reports.--
``(1) In general.--If a person required to file a report
under a provision referred to in paragraph (2) fails to file
such report at the time and in the manner required by such
provision, such person shall pay a penalty of $50 for each
failure unless it is shown that such failure is due to
reasonable cause.
``(2) Provisions.--The provisions referred to in this
paragraph are--
``(A) subsections (i) and (l) of section 408
(relating to individual retirement plans), and
``(B) section 220(h) (relating to medical savings
accounts).''.
(h) Exception From Capitalization of Policy Acquisition Expenses.--
Subparagraph (B) of section 848(e)(1) (defining specified insurance
contract) is amended by striking ``and'' at the end of clause (ii), by
striking the period at the end of clause (iii) and inserting ``, and'',
and by adding at the end the following new clause:
``(iv) any contract which is a medical savings
account (as defined in section 220(d)).''.
(i) Clerical Amendment.--The table of sections for part VII of
subchapter B of chapter 1 is amended by striking the last item and
inserting the following:
``Sec. 220. Medical savings accounts.
``Sec. 221. Cross reference.''.
(j) Effective <<NOTE: 26 USC 62 note.>> Date.--The amendments made
by this section shall apply to taxable years beginning after December
31, 1996.
(k) Monitoring <<NOTE: 26 USC 220 note.>> of Participation in
Medical Savings Accounts.--The Secretary of the Treasury or his delegate
shall--
(1) during 1997, 1998, 1999, and 2000, regularly evaluate
the number of individuals who are maintaining medical savings
accounts and the reduction in revenues to the United States by
reason of such accounts, and
(2) provide such reports of such evaluations to Congress as
such Secretary determines appropriate.
(l) Study <<NOTE: 26 USC 220 note.>> of Effects of Medical Savings
Accounts on Small Group Market.--The Comptroller General of the United
States shall enter into a contract with an organization with expertise
in health economics, health insurance markets, and actuarial science to
conduct a comprehensive study regarding the effects of medical savings
accounts in the small group market on--
(1) selection, including adverse selection,
(2) health costs, including any impact on premiums of
individuals with comprehensive coverage,
(3) use of preventive care,
(4) consumer choice,
(5) the scope of coverage of high deductible plans purchased
in conjunction with such accounts, and
(6) other relevant items.
A report <<NOTE: Reports.>> on the results of the study conducted under
this subsection shall be submitted to the Congress no later than January
1, 1999.
Contents
Contents
Prev
Next
Last
