One-time distribution from retirement plans to fund health savings accounts

(a)

In general

Section 402 of the Internal Revenue Code of 1986 (relating to taxability of beneficiary of employees’ trust) is amended by adding at the end the following new subsection:

(l)

HSA funding distribution

(1)

In general

In the case of an employee who is an eligible individual and who elects the application of this subsection for a taxable year, gross income of the employee for the taxable year does not include a qualified HSA funding distribution. (2)

Qualified HSA funding distribution

For purposes of this subsection, the term qualified HSA funding distribution means a distribution from an eligible retirement plan of the employee to the extent that such distribution is contributed to the health savings account of the employee not later than the 60th day after the day on which the employee receives such distribution or in a direct trustee-to-trustee transfer. (3)

Limitation

(A)

Maximum dollar limitations based on coverage in effect at time of contribution

The amount excluded from gross income by paragraph (1) shall not exceed— (i)in the case of an individual who has self-only coverage under a high deductible health plan as of the first day of the month in which the qualified HSA funding distribution is contributed to the health savings account of the employee, the lesser of— (I)the amount specified under clause (i) of section 223(b)(2)(A), or (II)the amount in effect for the taxable year under clause (ii) of section 223(b)(2)(A) (determined without regard to paragraphs (3) and (4)(C) of section 223(b)), reduced by any amount contributed to such account for such taxable year before the date of the qualified HSA funding distribution contribution, and (ii)in the case of an individual who has family coverage under a high deductible health plan as of the first day of the month in which the qualified HSA funding distribution is contributed to the health savings account of the employee, the lesser of— (I)the amount specified under clause (i) of section 223(b)(2)(B), or (II)the amount in effect for the taxable year under clause (ii) of section 223(b)(2)(B) (determined without regard to paragraphs (3) and (4)(C) of section 223(b)), reduced by any amount contributed to such account for such taxable year before the date of the qualified HSA funding distribution contribution. (B)

One-time transfer

The election under paragraph (1) shall apply to the taxable year for which made and all subsequent taxable years. Such an election, once made, shall be irrevocable. (4)

Distributions must otherwise be includible

(A)

In general

An amount shall be treated as a distribution for purposes of paragraph (1) only to the extent that such amount would be includible in gross income without regard to paragraph (1). (B)

Application of section 72

Notwithstanding section 72, in determining the extent to which an amount is treated as a distribution for purposes of subparagraph (A), the aggregate amounts distributed from an eligible retirement plan in a taxable year shall be treated as includible in gross income (without regard to subparagraph (A)) to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts distributed from all eligible retirement plans were treated as 1 contract for purposes of determining the inclusion of such distribution under section 72. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years. (5)

Definitions

For purposes of this subsection— (A)

Eligible retirement plan

The term eligible retirement plan has the meaning given such term by subsection (c)(8)(B), except that such term shall also include an eligible deferred compensation plan maintained by an eligible employer described in section 457(e)(1)(B). (B)

Eligible individual

The term eligible individual has the meaning given such term by section 223(c)(1). (6)

Special rules

For purposes of this subsection— (A)

Related plans treated as 1

All eligible retirement plans of an employer shall be treated as a single plan. (B)

Surviving spouses, dependents, and alternate payees

With respect to an eligible retirement plan of an employer, a surviving spouse, a dependent of the surviving spouse, or alternate payee (as defined in section 414(p)(8)) of a former employee shall be treated in the same manner as the former employee.

(b)

Coordination with limitation on contributions to health savings accounts

Section 223(b)(4) of such Code (relating to coordination with other contributions) is amended by striking and at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting , and, and by inserting after subparagraph (B) the following new subparagraph:

(C)the aggregate amount contributed to health savings accounts of such individual for such taxable year under section 402(l) (and such amount shall not be allowed as a deduction under subsection (a)).

(c)

10-percent penalty on early distributions not to apply

Section 72(t)(2)(A) of such Code (relating to subsection not to apply to certain distributions) is amended by striking or at the end of clause (vi), by striking the period at the end of clause (vii) and inserting , or, and by inserting after clause (vii) the following new clause:

(viii)a qualified HSA funding distribution (as defined by section 402(l)).

(d)

Conforming amendments

(1)Section 401(k)(2)(B)(i) of such Code (relating to cash or deferred arrangements) is amended by striking or at the end of subclause (III), by striking and at the end of subclause (IV) and inserting or, and by inserting after subclause (IV) the following new subclause:

(V)the funding of a health savings account under section 402(l), and

(2)Section 402(c)(4) of such Code (relating to rules applicable to rollovers from exempt trusts) is amended by striking and at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting , and, and by inserting after subparagraph (C) the following new subparagraph:

(D)any qualified HSA funding distribution (as defined by subsection (l)).

(3)Section 403(a) of such Code (relating to taxability of beneficiary under a qualified annuity plan) is amended by inserting after paragraph (1) the following new paragraph:

(2)

Special rule for qualified HSA funding distribution

To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.

(4)Section 403(b) of such Code (relating to taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school) is amended by inserting after paragraph (1) the following new paragraph:

(2)

Special rule for qualified HSA funding distribution

To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.

(5)Section 457(a) of such Code (relating to year of inclusion in gross income) is amended by adding at the end the following new paragraph:

(3)

Special rule for qualified HSA funding distribution

To the extent provided in section 402(l), paragraph (1) shall not apply to amounts otherwise includible in gross income under this subsection.

(e)

Effective date

The amendments made by this section shall apply to distributions in taxable years beginning after December 31, 2004.