[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4649 Introduced in House (IH)]







105th CONGRESS
  2d Session
                                H. R. 4649

     To amend the Internal Revenue Code of 1986 to provide for the 
 establishment of medical security accounts for individuals who are 40 
                          years old or older.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                           September 26, 1998

Mr. Snowbarger introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
     To amend the Internal Revenue Code of 1986 to provide for the 
 establishment of medical security accounts for individuals who are 40 
                          years old or older.

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

SECTION 1. MEDICAL SECURITY ACCOUNTS FOR INDIVIDUALS WHO ARE 40 OR 
              OLDER.

    (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 222 as 
section 223 and by inserting after section 221 the following new 
section:

``SEC. 222. MEDICAL SECURITY ACCOUNTS FOR INDIVIDUALS WHO ARE 40 OR 
              OLDER.

    ``(a) Deduction Allowed.--In the case of an individual who is an 
eligible individual 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 security account of such individual.
    ``(b) Limitations.--For purposes of this section--
            ``(1) In general.--The amount allowable as a deduction 
        under subsection (a) to an individual for the taxable year 
        shall not exceed the lesser of--
                    ``(A) the limitation amount (one-half of such 
                amount in the case of an individual who has attained 
                age 56 before the end of the taxable year), or
                    ``(B) an amount equal to the compensation 
                includible in the individual's gross income for such 
                taxable year.
            ``(2) Limitation amount.--The term `limitation amount' 
        means $5,000.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Medical security account.--The term `medical security 
        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 (e)(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 the 
                        limitation amount specified in subsection 
                        (b)(2).
                    ``(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) Eligible individual.--The term `eligible individual' 
        means any individual who has attained age 40 before the end of 
        the taxable year.
            ``(3) Qualified medical expenses.--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.
            ``(4) Account holder.--The term `account holder' means the 
        individual on whose behalf the medical security account was 
        established.
    ``(d) Certain Rules to Apply.--Rules similar to the following rules 
shall apply for purposes of this section:
            ``(1) Section 219(d)(2) (relating to no deduction for 
        rollovers).
            ``(2) Section 219(f)(3) (relating to time when 
        contributions deemed made).
            ``(3) Except as provided in section 106(b), section 
        219(f)(5) (relating to employer payments).
            ``(4) Section 408(g) (relating to community property laws).
            ``(5) Section 408(h) (relating to custodial accounts).
    ``(e) Tax Treatment of Accounts.--
            ``(1) In general.--A medical security account is exempt 
        from taxation under this subtitle unless such account has 
        ceased to be a medical security 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 
        security 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 security account 
        which is used exclusively to pay--
                    ``(A) qualified medical expenses of any account 
                holder who has attained age 55 before the close of the 
                taxable year, or
                    ``(B) for continuation coverage (within the meaning 
                of section 4980B(f)) under a group health plan,
        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 
        security 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 security 
                account of an individual, paragraph (2) shall not apply 
                to distributions from the medical security 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 
                security 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), (B), and (C).
                    ``(A) In general.--Paragraph (2) shall not apply to 
                any amount paid or distributed from a medical security 
                account to the account holder to the extent the amount 
                received is paid into a medical security 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) Limitations.--This paragraph shall not apply 
                to any amount described in subparagraph (A) received by 
                an individual from a medical security 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 security 
                account which was not includible in the individual's 
                gross income because of the application of this 
                paragraph.
                    ``(C) Rollover from medical savings account.--An 
                amount is not described in this paragraph if such 
                amount is paid or distributed from a medical savings 
                account (as defined in section 220(d)(1)) to the 
                account holder of such account and if--
                            ``(i) at any time prior to such receipt, 
                        such account holder received any other amount 
                        from a medical savings account which was 
                        contributed to a medical security account, or
                            ``(ii) the amount from such medical savings 
                        account contributed to the medical security 
                        account exceeds the limitation amount specified 
                        in subsection (b)(2).
            ``(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 
        security 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 security 
        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 security 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 security 
                account by reason of being the designated beneficiary 
                of such account at the death of the account holder, 
                such medical security 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 security account in a case to which 
                        subparagraph (A) does not apply--
                                    ``(I) such account shall cease to 
                                be a medical security 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 1999, the $5,000 amount in 
subsection (b)(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 1998' 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 
security 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) Coordination With Other Medical Savings Accounts 
Provisions.--No deduction shall be allowed under subsection (a) for any 
expense for which a deduction or credit is allowed under any other 
provision of this chapter.''.
    (b) Deduction Allowed Whether or Not Individual Itemizes Other 
Deductions.--Subsection (a) of section 62 of such Code is amended by 
inserting after paragraph (17) the following new paragraph:
            ``(18) Medical security accounts for individuals who are 40 
        or older.--The deduction allowed by section 222.''.
    (c) Exclusions for Employer Contributions to Medical Security 
Accounts.--Section 106 of such Code is amended by adding at the end the 
following new subsection:
    ``(d) Contributions to Medical Security 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 security 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 222(b) (determined 
        without regard to this subsection) which is applicable to such 
        employee for such taxable year.
            ``(2) Applicable rules.--For purposes of this subsection, 
        rules similar to the rules of paragraphs (2), (3), (4), and (5) 
        of subsection (b) shall apply.
            ``(3) Eligible individual.--For purposes of this 
        subsection, the terms `eligible individual' and `medical 
        security account' have the respective meanings given to such 
        terms by section 222.''.
    (d) Employer Contributions Required To Be Shown On W-2.--Section 
6051(a) of such Code is amended by striking ``and'' at the end of 
paragraph (10), by striking the period at the end of paragraph (11) and 
inserting ``, and'', and by inserting after paragraph (11) the 
following new paragraph:
            ``(12) the amount contributed to any medical security 
        account (as defined in section 222(c)) of such employee or such 
        employee's spouse.''.
    (e) Tax on Excess Contributions.--Section 4973 of such Code 
(relating to tax on excess contributions to individual retirement 
accounts, certain section 403(b) contracts, and certain individual 
retirement annuities) is amended--
            (1) in subsection (a) by striking ``or'' at the end of 
        paragraph (3), by inserting ``or'' at the end of paragraph (4), 
        and by inserting after paragraph (4) the following new 
        paragraph:
            ``(5) a medical security account (within the meaning of 
        section 222(c)),'', and
            (2) by adding at the end the following new subsection:
    ``(g) Excess Contributions to Medical Security Accounts.--For 
purposes of this section, in the case of medical security accounts 
(within the meaning of section 222(e)), 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 222(f)(5)) which is neither excludable from gross 
        income under section 106(b) nor allowable as a deduction under 
        section 222 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 222(f)(2), 
                and
                    ``(B) the excess (if any) of--
                            ``(i) the maximum amount allowable as a 
                        deduction under section 222(b) (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 
222(f)(3) applies shall be treated as an amount not contributed.''.
    (f) Tax on Prohibited Transactions.--
            (1) Subsection (c) of section 4975 of such Code is amended 
        by adding at the end the following new paragraph:
            ``(4) Special rule for medical security accounts.--An 
        individual for whose benefit a medical security account (within 
        the meaning of section 222(c) 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 section 222(e)(2) applies to 
        such transaction.''.
            (2) Paragraph (1) of section 4975(e) of such Code is 
        amended by striking ``or'' at the end of subparagraph (E), by 
        redesignating subparagraph (F) as subparagraph (G), and by 
        inserting after subparagraph (E) the following new 
        subparagraph:
                    ``(F) a medical security account described in 
                section 222(c).''.
    (g) Failure To Provide Reports on Medical security Accounts.--
Paragraph (2) of section 6693(a) of such Code is amended by striking 
``and'' at the end of subparagraph (C), by striking the period at the 
end of subparagraph (D) and inserting ``, and'', and by inserting after 
subparagraph (D) the following new subparagraph:
                    ``(E) Section 222(h) (relating to medical security 
                accounts for individuals who are 40 or older).''.
    (h) 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. 222. Medical security accounts for 
                                        individuals who are 40 or 
                                        older.
                              ``Sec. 223. Cross reference.''.
    (i) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1998.
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