[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 1247 Introduced in Senate (IS)]







104th CONGRESS
  1st Session
                                S. 1247

  To amend the Internal Revenue Code of 1986 to allow a deduction for 
  contributions to a medical savings account by any individual who is 
           covered under a catastrophic coverage health plan.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

           September 15 (legislative day, September 5), 1995

  Mr. Grassley (for himself, Mr. Kyl, and Mr. Nickles) 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 a deduction for 
  contributions to a medical savings account by any individual who is 
           covered under a catastrophic coverage health plan.
    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Family Medical Savings and 
Investment Act of 1995''.

SEC. 2. MEDICAL SAVINGS ACCOUNTS.

    (a) In General.--Part VII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (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.--Except as otherwise provided in this 
        subsection, the amount allowable as a deduction under 
        subsection (a) to an individual for the taxable year shall not 
        exceed the lesser of--
                    ``(A) $2,500, or
                    ``(B) the deductible under the catastrophic health 
                plan covering such individual.
        If the catastrophic health plan covering such individual 
        provides coverage for any other eligible individual who is the 
        spouse or any dependent (as defined in section 152) of the 
        taxpayer, subparagraph (A) shall be applied by substituting 
        `$5,000' for `$2,500'. The preceding sentence shall not apply 
        if the spouse or any dependent (as so defined) of such 
        individual is covered under any other catastrophic health plan.
            ``(2) Proration of limitation.--
                    ``(A) In general.--The limitation under paragraph 
                (1) shall be the sum of the monthly limitations for 
                months during the taxable year that the individual is 
                an eligible individual if--
                            ``(i) such individual is not an eligible 
                        individual for all months of the taxable year,
                            ``(ii) the deductible under the 
                        catastrophic health plan covering such 
                        individual is not the same throughout such 
                        taxable year, or
                            ``(iii) such limitation is determined using 
                        the next to the last sentence of paragraph (1) 
                        for some but not all months during such taxable 
                        year.
                    ``(B) Monthly limitation.--The monthly limitation 
                for any month shall be an amount equal to \1/12\ of the 
                limitation which would (but for this paragraph and 
                paragraph (3)) be determined under paragraph (1) if the 
                facts and circumstances as of the first day of such 
                month that such individual is covered under a 
                catastrophic health plan were true for the entire 
                taxable year.
            ``(3) 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 paid to any medical savings 
                account of such individual which is excludable from 
                gross income under section 106(b) for such year, or
                    ``(B) in a case described in paragraph (4)(B), any 
                amount is paid to any medical savings account of either 
                spouse which is so excludable for such year.
            ``(4) Special rule for married individuals.--
                    ``(A) In general.--This subsection shall be applied 
                separately for each married individual.
                    ``(B) Special rule.--If individuals who are married 
                to each other are covered under the same catastrophic 
                health plan, then the amounts applicable under 
                subparagraphs (A) and (B) of paragraph (1) shall be 
                divided equally between them unless they agree on a 
                different division.
            ``(5) 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--
                            ``(i) who is covered under a catastrophic 
                        health plan at any time during such month, and
                            ``(ii) who is not, while covered under a 
                        catastrophic health plan, covered under any 
                        health plan--
                                    ``(I) which is not a catastrophic 
                                health plan, and
                                    ``(II) which provides coverage for 
                                any benefit which is covered under the 
                                catastrophic health plan.
                    ``(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 for accidents, dental care, 
                        vision care, or long-term care.
            ``(2) Catastrophic health plan.--The term `catastrophic 
        health plan' means any health plan which provides no 
        compensation for an individual's expenses covered by the plan 
        for any calendar year to the extent such expenses for such 
        calendar year do not exceed $1,500 ($3,000 if the catastrophic 
        health plan covering the taxpayer provides coverage for more 
        than 1 individual) or such higher amounts as may be specified 
        by the plan.
            ``(3) Permitted insurance.--The term `permitted insurance' 
        means--
                    ``(A) Medicare supplemental health 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,
                            ``(iv) credit insurance, or
                            ``(v) such other similar liabilities as the 
                        Secretary may specify by regulations,
                    ``(C) insurance for a specified disease or illness, 
                and
                    ``(D) a hospital or fixed indemnity policy.
    ``(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)(4), no contribution will be 
                accepted unless it is in cash.
                    ``(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--
                            ``(i) 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, or
                            ``(ii) for long-term care insurance for 
                        such individual, spouse, or dependent.
                    ``(B) Health insurance may not be purchased from 
                account.--Subparagraph (A)(i) shall not apply to 
                amounts paid for insurance.
            ``(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) Account taxed as grantor trust.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the account holder 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. For purposes of this subparagraph, all 
                medical savings accounts of the account holder shall be 
                treated as 1 account.
            ``(2) Account assets treated as distributed in the case of 
        prohibited transactions or account pledged as security for 
        loan.--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) 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 holder shall be included in the gross 
                income of such holder to the extent such amount does 
                not exceed the excess of--
                            ``(i) the aggregate contributions to such 
                        account which were allowed as a deduction under 
                        this section or which were excluded under 
                        section 106(b), 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 medical savings accounts of the 
                        account holder shall be treated as 1 account,
                            ``(ii) all payments and distributions 
                        during any taxable year shall be treated as 1 
                        distribution, and
                            ``(iii) any distribution of property shall 
                        be taken into account at its fair market value 
                        on the date of the distribution.
            ``(2) Penalty for distributions not used for qualified 
        medical expenses.--
                    ``(A) In general.--The tax imposed by this chapter 
                for any taxable year in which there is a payment or 
                distribution from a medical savings account which is 
                not used exclusively to pay the qualified medical 
                expenses of the account holder shall be increased by 10 
                percent of the amount of such payment or distribution 
                which is includible in gross income under paragraph 
                (1).
                    ``(B) Exceptions.--Subparagraph (A) shall not apply 
                if the payment or distribution is made on or after the 
                date the account holder--
                            ``(i) attains age 59\1/2\,
                            ``(ii) becomes disabled within the meaning 
                        of section 72(m)(7), or
                            ``(iii) dies.
            ``(3) Withdrawal of excess contributions.--Paragraph (1) 
        shall not apply to the distribution of any contribution paid 
        during a taxable year to a medical savings account if--
                    ``(A) such distribution is received on or before 
                the day prescribed by law (including extensions of 
                time) for filing such individual's return for such 
                taxable year,
                    ``(B) no deduction is allowed under this section 
                with respect to such contribution, and
                    ``(C) such distribution is accompanied by the 
                amount of net income attributable to such contribution.
        In the case of such a distribution, for purposes of section 61, 
        any net income described in subparagraph (C) shall be deemed to 
        have been earned and receivable in the taxable year in which 
        such contribution is made.
            ``(4) Rollovers.--Paragraph (1) shall not apply to any 
        amount paid or distributed out of a medical savings account to 
        the account holder if the entire amount received (including 
        money and any other property) is paid into another medical 
        savings account for the benefit of such holder not later than 
        the 60th day after the day on which he received the payment or 
        distribution.
            ``(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).
    ``(g) Cost-of-Living Adjustment.--
            ``(1) In general.--In the case of any taxable year 
        beginning in a calendar year after 1996, each dollar amount in 
        subsection (b)(1) or in subsection (c)(2) shall be increased by 
        an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the medical care cost adjustment for such 
                calendar year.
        If any increase under the preceding sentence is not a multiple 
        of $50, such increase shall be rounded to the nearest multiple 
        of $50.
            ``(2) Medical care cost adjustment.--For purposes of 
        paragraph (1), the medical care cost adjustment for any 
        calendar year is the percentage (if any) by which--
                    ``(A) the medical care component of the Consumer 
                Price Index (as defined in section 1(f)(5)) for August 
                of the preceding calendar year, exceeds
                    ``(B) such component for August of 1995.
    ``(h) Reports.--The trustee of a medical savings account shall 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 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) Deduction Allowed Whether or Not Individual Itemizes Other 
Deductions.--Subsection (a) of section 62 of such Code 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 of 
        such Code (relating to contributions by employer to accident 
        and health plans) is amended to read as follows:
    ``(a) General Rule.--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, gross income does not include amounts 
        contributed by such employee's employer to any medical savings 
        account of such employee.
            ``(2) Coordination with deduction limitation.--The amount 
        excluded from the gross income of an employee under this 
        subsection for any taxable year shall 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.''
            ``(3) 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.
            ``(4) 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.
            ``(5) 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.''
            (2) Exclusion from employment taxes.--
                    (A) Social security taxes.--
                            (i) Subsection (a) of section 3121 of such 
                        Code 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).''
                            (ii) Subsection (a) of section 209 of the 
                        Social Security Act is amended by striking 
                        ``or'' at the end of paragraph (17), by 
                        striking the period at the end of paragraph 
                        (18) and inserting ``; or'', and by inserting 
                        after paragraph (18) the following new 
                        paragraph:
            ``(19) 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.''
                    (B) Railroad retirement tax.--Subsection (e) of 
                section 3231 of such Code 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).''
                    (C) Unemployment tax.--Subsection (b) of section 
                3306 of such Code 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).''
                    (D) Withholding tax.--Subsection (a) of section 
                3401 of such Code 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).''
    (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 Prohibited Transactions.--Section 4975 of such Code 
(relating to tax on 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 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.'', and
            (2) by inserting ``or a medical savings account described 
        in section 220(d)'' in subsection (e)(1) after ``described in 
        section 408(a)''.
    (f) Failure To Provide Reports on Medical Savings Accounts.--
Section 6693 of such Code (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 220(h) 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 to so file unless it is shown that such failure is 
        due to reasonable cause.''
    (g) Clerical Amendments.--
            (1) The table of sections for part VII of subchapter B of 
        chapter 1 of such Code is amended by striking the last item and 
        inserting the following:

                              ``Sec. 220. Medical savings accounts.
                              ``Sec. 221. Cross reference.''
            (2) The table of sections for subchapter B of chapter 68 of 
        such Code is amended by inserting ``or on medical savings 
        accounts'' after ``annuities'' in the item relating to section 
        6693.
    (h) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 3. PERMITTING GOVERNMENT CONTRIBUTIONS TO BE MADE UNDER THE 
              FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM FOR MEDICAL 
              SAVINGS ACCOUNTS AND CATASTROPHIC HEALTH PLANS.

    (a) Offering of Catastrophic Health Plans.--
            (1) In general.--Section 8903 of title 5, United States 
        Code (relating to health benefits plans) is amended by adding 
        at the end the following new paragraph:
            ``(5) Catastrophic health plans.--One or more plans 
        described in paragraph (1), (2), or (3), but which provide 
        benefits of the types referred to in paragraph (5) (rather than 
        paragraph (1), (2), or (3)) of section 8904(a).''
            (2) Types of benefits.--Subsection (a) of section 8904 of 
        such title (relating to types of benefits) is amended by 
        inserting after paragraph (4) the following new paragraph:
            ``(5) Catastrophic health plans.--Benefits of the types 
        named under paragraph (1) or (2) of this subsection or both, 
        but only to the extent expenses covered by the plan exceed the 
        dollar amount applicable under 220(c)(2) of the Internal 
        Revenue Code of 1986.''
    (b) Government Contribution.--
            (1) Contribution to medical savings account.--Section 8906 
        of such title (relating to contributions) is amended by adding 
        at the end the following new subsection:
    ``(j)(1) In the case of an employee or annuitant who is enrolled in 
a catastrophic health plan described by section 8903(5), in addition to 
the Government contribution under the preceding provisions of this 
section, there shall be made a Government contribution under this 
subsection to a medical savings account for which the employee or 
annuitant is an account holder.
    ``(2) The amount of the Government contribution under this 
subsection with respect to an employee or annuitant is equal to the 
amount by which--
            ``(A) the maximum Government contribution under the 
        preceding provisions of this section, as determined under 
        subsection (b) (but disregarding the limitation under paragraph 
        (2) thereof); exceeds
            ``(B) the amount of the Government contribution made with 
        respect to such employee or annuitant under the preceding 
        provisions of this section.
    ``(3) The Office shall prescribe regulations under which Government 
contributions under this subsection shall be paid into a medical 
savings account. Such regulations--
            ``(A) shall specify the time, form, and manner in which an 
        individual must provide any information necessary in order to 
        receive contributions under this subsection, including, if 
        feasible, an opportunity to provide such information not later 
        than 60 days after becoming enrolled in a catastrophic health 
        plan described by section 8903(5); and
            ``(B) shall permit an individual who is an account holder 
        of more than one medical savings account to elect the account 
        to which contributions under this subsection shall be made.
    ``(4)(A) Government contributions under this subsection shall be 
made on the same biweekly or other basis as applies with respect to the 
Government contributions under the preceding provisions of this 
section.
    ``(B) Subsections (f) and (g) shall apply with respect to 
Government contributions under this subsection in the same manner as 
they apply with respect to Government contributions under the preceding 
provisions of this section.
    ``(5) Government contributions under this subsection--
            ``(A) shall not be payable in the case of any individual 
        who is ineligible for Government contributions under the 
        preceding provisions of this section; and
            ``(B) shall not be taken into account in determining the 
        amount that any individual referred to in subparagraph (A) is 
        required to pay into the Employees Health Benefits Fund for 
        coverage under this chapter.
    ``(6) For the purpose of this subsection, the term `medical savings 
account' has the meaning given such term by section 220(d) of the 
Internal Revenue Code of 1986.''
            (2) Catastrophic health plans not to be taken into account 
        in determining level of government contributions generally.--
        Section 8906(a)(3) of such title is amended by inserting 
        ``described by section 8903(3) or 8903a'' after ``plans''.
            (3) Retroactive contributions for employees who enroll 
        pursuant to reinstatement after a wrongful suspension or 
        removal.--See 5 U.S.C. 8908(a).
    (c) Effective Date.--The amendments made by this section shall 
apply to contract terms beginning after December 31, 1995.
                                 <all>
S 1247 IS----2