[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[S. 2532 Introduced in Senate (IS)]

103d CONGRESS
  2d Session
                                S. 2532

      To amend the Internal Revenue Code of 1986 to allow for the 
 establishment of medical savings accounts for individuals covered by 
                 certain high deductible health plans.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

            October 6 (legislative day, September 12), 1994

Mr. Roth (for himself, Mr. Boren, Mr. Simon, and Mr. Coats) introduced 
the following bill; which was read twice and referred to the Committee 
                               on Finance

_______________________________________________________________________

                                 A BILL


 
      To amend the Internal Revenue Code of 1986 to allow for the 
 establishment of medical savings accounts for individuals covered by 
                 certain high deductible health plans.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``Medical Savings 
Account Tax Incentive Act''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. DEDUCTION FOR CONTRIBUTIONS TO 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. CONTRIBUTIONS TO MEDICAL SAVINGS ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an eligible individual, 
the amounts paid in cash during the taxable year by such individual to 
a medical savings account for the benefit of such individual or for the 
benefit of such individual and any spouse or dependent of such 
individual who is an eligible individual shall be treated for purposes 
of sections 162(l) and 213 as amounts paid for insurance which 
constitutes medical care.
    ``(b) Limitations.--
            ``(1) Only 1 account per family.--Except as provided in 
        regulations prescribed by the Secretary, no amount shall be 
        treated as paid for insurance by reason of subsection (a) for 
        amounts paid to any medical savings account if the account 
        beneficiary, or such beneficiary's spouse or dependent, is a 
        beneficiary of any other medical savings account.
            ``(2) Dollar limitation.--
                    ``(A) In general.--The aggregate amount which may 
                be treated as paid for insurance under subsection (a) 
                with respect to any account beneficiary shall not 
                exceed the excess (if any) of--
                            ``(i) the premium determined under 
                        subparagraph (B) for the same class of 
                        enrollment as the high deductible health plan 
                        described in subsection (c)(1)(A), over
                            ``(ii) the cost of such high deductible 
                        health plan.
                    ``(B) Premium.--Not later than January 1 of each 
                calendar year, the Secretary shall determine and 
                publish the premium (for each class of enrollment) for 
                the preceding calendar year for the health benefits 
                plan offered under chapter 89 of title 5, United States 
                Code, with the highest enrollment (determined on the 
                basis of the annual open enrollment period).
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Eligible individual.--The term `eligible individual' 
        means any individual--
                    ``(A) who is covered under a high deductible health 
                plan during any portion of the calendar year with or 
                within which the taxable year begins, and
                    ``(B) who is not eligible during such calendar 
                year--
                            ``(i) to participate in an employer-
                        subsidized health plan maintained by an 
                        employer of the individual, the individual's 
                        spouse, or any dependent of either, or
                            ``(ii) to receive any employer contribution 
                        to a medical savings account.
        For purposes of subparagraph (B), a self-employed individual 
        (within the meaning of section 401(c)) shall not be treated as 
        his own employer.
            ``(2) High deductible health plan.--
                    ``(A) In general.--The term `high deductible health 
                plan' means a health plan which--
                            ``(i) has an annual deductible limit for 
                        each individual covered by the plan which is 
                        not less than $1,000 or more than $3,000, and
                            ``(ii) has an annual limit on the aggregate 
                        amount of deductibles required to be paid with 
                        respect to all individuals covered by the plan 
                        which is not less than $2,000 or more than 
                        $5,500.
                    ``(B) Cost-of-living adjustment.--In the case of 
                taxable years beginning after December 31, 1996, each 
                dollar amount contained in subparagraph (A) shall be 
                increased by an amount equal to the product of--
                            ``(i) such dollar amount, and
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        except that such section shall be applied by 
                        substituting `the medical component of the CPI' 
                        for `the CPI' each place it appears and by 
                        substituting `1995' for `1992' in subparagraph 
                        (B).
                If any amount under this paragraph is not a multiple of 
                $100, such amount shall be rounded to the next lowest 
                multiple of $100.
            ``(3) Medical savings account.--The term `medical savings 
        account' has the meaning given such term by section 7705.
            ``(4) Time when contributions deemed made.--A contribution 
        shall be deemed to be made on the last day of the preceding 
        taxable year if the contribution is made on account of such 
        taxable year and is made not later than the time prescribed by 
        law for filing the return for such taxable year (not including 
        extensions thereof).''
    (b) 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 new item:

                              ``Sec. 220. Contributions to medical 
                                        savings accounts.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 3. EXCLUSION FROM INCOME OF EMPLOYER CONTRIBUTIONS TO MEDICAL 
              SAVINGS ACCOUNTS.

    (a) In General.--Section 106 (relating to contributions by 
employers to accident and health plans) is amended by adding at the end 
the following new subsection:
    ``(b) Contributions to Medical Savings Accounts.--
            ``(1) Treatment of contributions.--
                    ``(A) In general.--Gross income of an employee who 
                is covered by a high deductible health plan of an 
                employer shall not include any employer contribution to 
                a medical savings account on behalf of the employee or 
                the employee's spouse or dependents.
                    ``(B) No constructive receipt.--No amount shall be 
                included in the gross income of any employee solely 
                because the employee may choose between the 
                contributions described in subparagraph (A) and 
                employer contributions to a health plan of the 
                employer.
            ``(2) Dollar limitation.--The amount which may be excluded 
        under paragraph (1) for any taxable year shall not exceed the 
        high deductible health plan differential.
            ``(3) High deductible health plan differential.--For 
        purposes of paragraph (2)(B), the high deductible health plan 
        differential with respect to any employee is the amount by 
        which the cost of the high deductible health plan in which the 
        employee is enrolled is less than the lesser of--
                    ``(A) the cost (for the same class of enrollment) 
                of the health plan which--
                            ``(i) the employee is eligible to enroll in 
                        through the employer, and
                            ``(ii) has the highest cost of all health 
                        plans in which the employee may enroll in 
                        through the employer, or
                    ``(B) the amount determined under section 
                220(b)(2)(B).
            ``(4) Definitions.--For purposes of this subsection--
                    ``(A) High deductible health plan.--The term `high 
                deductible health plan' has the meaning given such term 
                by section 220(c)(2).
                    ``(B) Medical savings account.--The term `medical 
                savings account' has the meaning given such term by 
                section 7705.''
    (b) Employer Payments Excluded From Employment Tax Base.--
            (1) Social security taxes.--
                    (A) Subsection (a) of section 3121 is amended by 
                striking ``or'' at the end of paragraph (20), by 
                striking the period at the end of paragraph (21) and 
                inserting ``; or'', and by inserting after paragraph 
                (21) the following new paragraph:
            ``(22) 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) Subsection (a) of section 209 of the Social 
                Security Act is amended by striking ``or'' at the end 
                of paragraph (18), by striking the period at the end of 
                paragraph (19) and inserting ``; or'', and by inserting 
                after paragraph (19) the following new paragraph:
            ``(20) 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) of the Internal Revenue Code 
        of 1986.''
            (2) 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).''
            (3) 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).''
            (4) 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).''
    (c) Conforming Amendment.--Section 106 is amended by striking 
``Gross income'' and inserting:
    ``(a) General Rule.--Gross income''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 4. MEDICAL SAVINGS ACCOUNTS.

    (a) In General.--Chapter 79 is amended by adding at the end the 
following new section:

``SEC. 7705. MEDICAL SAVINGS ACCOUNTS.

    ``(a) General Rule.--The term `medical savings account' means a 
trust created or organized in the United States for the exclusive 
benefit of the beneficiaries of the trust, but only if the written 
governing instrument creating the trust meets the following 
requirements:
            ``(1) Except in the case of a rollover contribution 
        described in subsection (c)(4)--
                    ``(A) no contribution will be accepted unless--
                            ``(i) it is in cash, and
                            ``(ii) it is made for a period during which 
                        the individual on whose behalf it is made is 
                        covered under a high deductible health plan, 
                        and
                    ``(B) contributions will not be accepted for any 
                calendar year in excess of the amount determined under 
                section 220(b)(2)(B).
            ``(2) The trustee is a bank (as defined in section 408(n)), 
        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.
            ``(3) The assets of the trust will not be commingled with 
        other property except in a common trust fund or common 
        investment fund.
            ``(4) No part of the trust assets will be invested in life 
        insurance contracts.
            ``(5) The interest of an individual in the balance in the 
        individual's account is nonforfeitable.
    ``(b) Tax Treatment of Accounts.--
            ``(1) Account taxed as grantor trust.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the account beneficiary of a medical 
                savings account shall be treated for purposes of this 
                title as the owner of such account and shall be subject 
                to tax thereon in accordance with subpart E of part I 
                of subchapter J of this chapter (relating to grantors 
                and others treated as substantial owners).
                    ``(B) Treatment of capital losses.--With respect to 
                assets held in a medical savings account, any capital 
                loss for a taxable year from the sale or exchange of 
                such an asset shall be allowed only to the extent of 
                capital gains from such assets for such taxable year. 
                Any capital loss which is disallowed under the 
                preceding sentence shall be treated as a capital loss 
                from the sale or exchange of such an asset in the next 
                taxable year.
            ``(2) Account terminations.--
                    ``(A) Prohibited transactions; excess 
                withdrawals.--If, during any taxable year of the 
                account beneficiary--
                            ``(i) such beneficiary engages in any 
                        transaction prohibited by section 4975 with 
                        respect to the account, or
                            ``(ii) there is a distribution out of the 
                        account any portion of which is includible in 
                        the income of the account beneficiary under 
                        subsection (c)(1)(A), and after such 
                        distribution the balance in the account is less 
                        than the annual aggregate deductible limit for 
                        all individuals covered by the high deductible 
                        health plan,
                the account shall cease to be a medical savings account 
                as of the first day of such taxable year.
                    ``(B) Failure to remain in health plan.--
                            ``(i) In general.--If, at any time during 
                        the 2-taxable year period beginning with the 
                        taxable year of the account beneficiary in 
                        which the medical savings account was 
                        established, the account beneficiary becomes a 
                        participant in a health plan which has a lower 
                        individual (or aggregate) deductible limit than 
                        the lowest individual (or aggregate) limit 
                        permitted under a high deductible health plan, 
                        the account shall cease to be a medical savings 
                        account as of the first day of the taxable year 
                        in which the individual ceases to be so 
                        covered.
                            ``(ii) Exception.--This subparagraph shall 
                        not apply to any account beneficiary who 
                        becomes a participant in a plan described in 
                        such subparagraph by reason of separation from 
                        employment.
                    ``(C) Account treated as distributing all its 
                assets.--In any case in which any account ceases to be 
                a medical savings account by reason of subparagraph (A) 
                or (B) on the first day of any taxable year, subsection 
                (c) shall be applied as if--
                            ``(i) there were a distribution on such 
                        first day in an amount equal to the fair market 
                        value (on such first day) of all assets in the 
                        account (on such first day), and
                            ``(ii) no portion of such distribution were 
                        used to pay qualified medical expenses.
                    ``(D) Correction within 60 days.--Subparagraph 
                (A)(ii) shall not apply to any distribution if, within 
                60 days of the 1st date the account beneficiary knew 
                (or exercising reasonable diligence would have known) 
                of a failure to meet the requirements of subparagraph 
                (A)(ii), the account beneficiary repays to the account 
                the amount of the excess distribution. Such repayment 
                shall not be treated as a contribution to the account.
            ``(3) Effect of pledging account as security.--If, during 
        any taxable year, the account beneficiary uses the account or 
        any portion thereof as security for a loan, the portion so used 
        is treated as distributed and not used to pay qualified medical 
        expenses.
    ``(c) Tax Treatment of Distributions.--
            ``(1) Inclusion of amounts not used for qualified medical 
        expenses.--
                    ``(A) In general.--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 beneficiary or of the spouse or dependents 
                of such beneficiary shall be included in the gross 
                income of such beneficiary to the extent such amount 
                does not exceed the excess of--
                            ``(i) the aggregate contributions to such 
                        account which were not includible in gross 
                        income by reason of section 106(b) or which 
                        were deductible under section 220, over
                            ``(ii) the aggregate prior payments or 
                        distributions from such account which were 
                        includible in gross income under this 
                        paragraph.
                    ``(B) Special rules.--For purposes of subparagraph 
                (A)--
                            ``(i) all payments and distributions during 
                        any taxable year shall be treated as 1 
                        distribution, and
                            ``(ii) any distribution of property shall 
                        be taken into account at its fair market value 
                        on the date of the distribution.
            ``(2) Excess contributions returned before due date of 
        return.--Paragraph (1) shall not apply to the distribution of 
        any contribution paid during a taxable year to a medical 
        savings account to the extent that such contribution exceeds 
        the amount under subsection (a)(2) if--
                    ``(A) 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
                    ``(B) such distribution is accompanied by the 
                amount of net income attributable to such excess 
                contribution.
        Any net income described in subparagraph (B) shall be included 
        in the gross income of the individual for the taxable year in 
        which it is received.
            ``(3) Penalty for distributions not used for qualified 
        medical expenses.--
                    ``(A) In general.--The tax imposed by chapter 1 on 
                the account beneficiary for any taxable year in which 
                there is a payment or distribution from a medical 
                savings account of such beneficiary which is includible 
                in gross income under paragraph (1) shall be increased 
                by 10 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 beneficiary 
                becomes disabled within the meaning of section 72(m)(7) 
                or dies.
                    ``(C) Exception for distributions after age 59\1/
                2\.--Subparagraph (A) shall not apply to any payment or 
                distribution after the date on which the account 
                beneficiary attains age 59\1/2\.
            ``(4) 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 (1) shall not apply to 
                any amount paid or distributed from a medical savings 
                account to the account beneficiary to the extent the 
                amount received is paid into a medical savings account 
                for the benefit of such beneficiary not later than the 
                60th day after the day on which the beneficiary 
                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.
            ``(5) Coordination with medical expense deduction.--For 
        purposes of 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 to the 
        extent of the amount of such payment or distribution which is 
        excludable from gross income solely by reason of paragraph 
        (1)(A).
            ``(6)  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 at the time of the transfer 
        shall be treated as a medical savings account of such spouse, 
        and not of such individual. Any such account or annuity shall, 
        for purposes of this subtitle, be treated as maintained for the 
        benefit of the spouse to whom the interest was transferred.
    ``(d) Definitions.--For purposes of this section--
            ``(1) Qualified medical expenses.--
                    ``(A) In general.--The term `qualified medical 
                expenses' means any expense for--
                            ``(i) medical care (as defined in section 
                        213(d)), or
                            ``(ii) qualified long-term care services.
                    ``(B) Exception for insurance.--
                            ``(i) In general.--Such term shall not 
                        include any expense for insurance.
                            ``(ii) Exceptions.--Clause (i) shall not 
                        apply to any expense for--
                                    ``(I) coverage under a health plan 
                                during a period of continuation 
                                coverage described in section 
                                4980B(f)(2)(B),
                                    ``(II) coverage under a medicare 
                                supplemental policy (as defined in 
                                section 1882(g)(1) of the Social 
                                Security Act), or
                                    ``(III) payment of premiums under 
                                part A or B of title XVIII of the 
                                Social Security Act, or
                                    ``(IV) coverage under a policy 
                                providing qualified long-term care 
                                services.
                    ``(C) Qualified long-term care services.--For 
                purposes of this paragraph--
                            ``(i) In general.--The term `qualified 
                        long-term care services' means necessary 
                        diagnostic, preventive, therapeutic, 
                        rehabilitative, and maintenance (including 
                        personal care) services--
                                    ``(I) which are required by an 
                                individual during any period during 
                                which such individual is a functionally 
                                impaired individual,
                                    ``(II) which have as their primary 
                                purpose the provision of needed 
                                assistance with 1 or more activities of 
                                daily living which a functionally 
                                impaired individual is certified as 
                                being unable to perform under clause 
                                (ii)(I), and
                                    ``(III) which are provided pursuant 
                                to a continuing plan of care prescribed 
                                by a licensed health care practitioner 
                                (other than a relative of such 
                                individual).
                            ``(ii) Functionally impaired individual.--
                                    ``(I) In general.--The term 
                                `functionally impaired individual' 
                                means any individual who is certified 
                                by a licensed health care practitioner 
                                (other than a relative of such 
                                individual) as being unable to perform, 
                                without substantial assistance from 
                                another individual (including 
                                assistance involving verbal reminding, 
                                physical cueing, or substantial 
                                supervision), at least 3 activities of 
                                daily living described in clause (iii).
                                    ``(II) Special rule for home health 
                                care services.--In the case of services 
                                which are provided during any period 
                                during which an individual is residing 
                                within the individual's home (whether 
                                or not the services are provided within 
                                the home), subclause (I) shall be 
                                applied by substituting `2' for `3'. 
                                For purposes of this subclause, a 
                                nursing home or similar facility shall 
                                not be treated as a home.
                            ``(iii) Activities of daily living.--Each 
                        of the following is an activity of daily 
                        living:
                                    ``(I) Eating.
                                    ``(II) Transferring.
                                    ``(III) Toileting.
                                    ``(IV) Dressing.
                                    ``(V) Bathing.
                    ``(D) Licensed health care practitioner.--For 
                purposes of subparagraph (C)--
                            ``(i) In general.--The term `licensed 
                        health care practitioner' means--
                                    ``(I) a physician or registered 
                                professional nurse,
                                    ``(II) a qualified community care 
                                case manager (as defined in clause 
                                (ii)), or
                                    ``(III) any other individual who 
                                meets such requirements as may be 
                                prescribed by the Secretary after 
                                consultation with the Secretary of 
                                Health and Human Services.
                            ``(ii) Qualified community care case 
                        manager.--The term `qualified community care 
                        case manager' means an individual or entity 
                        which--
                                    ``(I) has experience or has been 
                                trained in providing case management 
                                services and in preparing individual 
                                care plans;
                                    ``(II) has experience in assessing 
                                individuals to determine their 
                                functional and cognitive impairment;
                                    ``(III) is not a relative of the 
                                individual receiving case management 
                                services; and
                                    ``(IV) meets such requirements as 
                                may be prescribed by the Secretary 
                                after consultation with the Secretary 
                                of Health and Human Services.
                    ``(E) Relative.--For purposes of this paragraph, 
                the term `relative' means an individual bearing a 
                relationship to another individual which is described 
                in paragraphs (1) through (8) of section 152(a).
            ``(2) Account beneficiary.--The term `account beneficiary' 
        means the individual for whose benefit the medical savings 
        account is maintained.
    ``(e) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if--
            ``(1) the assets of such account are held by a bank (as 
        defined in section 408(n)), 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 account will be consistent with the 
        requirements of this section, and
            ``(2) the custodial account would, except for the fact that 
        it is not a trust, constitute a medical savings account 
        described in subsection (a).
For purposes of this title, in the case of a custodial account treated 
as a trust by reason of the preceding sentence, the custodian of such 
account shall be treated as the trustee thereof.
    ``(f) Reports.--The trustee of a medical savings account shall make 
such reports regarding such account to the Secretary and to the 
individual for whose benefit the account is maintained with respect to 
contributions, distributions, and such other matters as the Secretary 
may require under regulations. 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 those 
regulations.''
    (b) 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 
        subsection (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 7705(a)), 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 a medical savings account 
(within the meaning of section 7705(a)), the term `excess 
contributions' means the amount by which the amount contributed for the 
taxable year to the account exceeds the amount which may be contributed 
to the account under section 7705(a)(1)(B) for such taxable year. For 
purposes of this subsection, any contribution which is distributed out 
of the medical savings account in a distribution to which section 
7705(c)(2) applies shall be treated as an amount not contributed.''
    (c) Tax on Prohibited Transactions.--Section 4975 (relating to 
prohibited transactions) is amended--
            (1) 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 7705(a)) 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 7705(b)(2)(A)(i) to 
        such account.'', and
            (2) by inserting ``or a medical savings account described 
        in section 7705(a)'' in subsection (e)(1) after ``described in 
        section 408(a)''.
    (d) Failure To Provide Reports on Medical Savings Accounts.--
Section 6693 (relating to failure to provide reports on individual 
retirement accounts or annuities) is amended--
            (1) by inserting ``or on medical savings accounts'' after 
        ``annuities'' in the heading of such section, and
            (2) by adding at the end of subsection (a) the following: 
        ``The person required by section 7705(f) to file a report 
        regarding a medical savings account at the time and in the 
        manner required by such section shall pay a penalty of $50 for 
        each failure unless it is shown that such failure is due to 
        reasonable cause.''
    (e) Clerical Amendments.--
            (1) The table of sections for chapter 43 is amended by 
        striking the item relating to section 4973 and inserting the 
        following:

                              ``Sec. 4973. Tax on excess contributions 
                                        to individual retirement 
                                        accounts, medical savings 
                                        accounts, certain 403(b) 
                                        contracts, and certain 
                                        individual retirement 
                                        annuities.''
            (2) The table of sections for subchapter B of chapter 68 is 
        amended by inserting ``or on medical savings accounts'' after 
        ``annuities'' in the item relating to section 6693.
    (f) Effective Date.--The amendments made by this section shall take 
effect on January 1, 1996.
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