[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 3488 Introduced in Senate (IS)]








109th CONGRESS
  2d Session
                                S. 3488

 To amend the Internal Revenue Code of 1986 to expand the permissible 
use of health savings accounts to include health insurance payments, to 
  increase the dollar limitation for contributions to health savings 
      accounts, to allow the rollover of unused funds from health 
 reimbursement arrangements to health savings accounts, and for other 
                               purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                              June 9, 2006

 Mr. Coburn (for himself, Mr. DeMint, Mr. Inhofe, Mr. Cornyn, and Mr. 
    Vitter) 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 expand the permissible 
use of health savings accounts to include health insurance payments, to 
  increase the dollar limitation for contributions to health savings 
      accounts, to allow the rollover of unused funds from health 
 reimbursement arrangements to health savings accounts, and for other 
                               purposes.

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

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Tax-Free 
Healthcare Savings, Access, and Portability Act''.
    (b) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; table of contents.
Sec. 2. Expansion of health savings accounts.
Sec. 3. Exception to requirement for employers to make comparable 
                            health savings account contributions.
Sec. 4. Deduction of premiums for high deductible health plans.
Sec. 5. Credit for certain employment taxes paid with respect to 
                            premiums for high deductible health plans 
                            and contributions to health savings 
                            accounts.
Sec. 6. HSA-qualified insurance portability.

SEC. 2. EXPANSION OF HEALTH SAVINGS ACCOUNTS.

    (a) Use of Account for Individual High Deductible Health Plan 
Premiums.--Section 223(d)(2)(C) of the Internal Revenue Code of 1986 
(relating to exceptions) is amended by striking ``or'' at the end of 
clause (iii), by striking the period at the end of clause (iv) and 
inserting ``, or'', and by adding at the end the following new clause:
                            ``(v) a high deductible health plan, but 
                        only if--
                                    ``(I) the plan is not a group 
                                health plan (as defined in section 
                                5000(b)(1) without regard to section 
                                5000(d)), and
                                    ``(II) the expenses are for 
                                coverage for a month with respect to 
                                which the account beneficiary is an 
                                eligible individual by reason of the 
                                coverage under the plan.
                For purposes of clause (v), an arrangement which 
                constitutes individual health insurance shall not be 
                treated as a group health plan, notwithstanding that an 
                employer or employee organization negotiates the cost 
                of benefits of such arrangement.''.
    (b) Special Rule for Certain Medical Expenses Incurred Before 
Establishment of Account.--Section 223(d)(2) of the Internal Revenue 
Code of 1986 (relating to qualified medical expenses) is amended by 
adding at the end the following new subparagraph:
                    ``(D) Certain medical expenses incurred before 
                establishment of account treated as qualified.--An 
                expense shall not fail to be treated as a qualified 
                medical expense solely because such expense was 
                incurred before the establishment of the health savings 
                account if such expense was incurred--
                            ``(i) during either--
                                    ``(I) the taxable year in which the 
                                health savings account was established, 
                                or
                                    ``(II) the preceding taxable year 
                                in the case of a health savings account 
                                established after the taxable year in 
                                which such expense was incurred but 
                                before the time prescribed by law for 
                                filing the return for such taxable year 
                                (not including extensions thereof), and
                            ``(ii) for medical care of an individual 
                        during the period beginning on the date such 
                        individual first became an eligible individual.
                For purposes of clause (ii), an individual shall be 
                treated as an eligible individual for any portion of a 
                month the individual is described in subsection (c)(1), 
                determined without regard to whether the individual is 
                covered under a high deductible health plan on the 1st 
                day of such month.''.
    (c) Increase in Monthly Contribution Limit.--
            (1) In general.--Paragraph (2) of section 223(b) of the 
        Internal Revenue Code of 1986 (relating to limitations) is 
        amended to read as follows:
            ``(2) Monthly limitation.--
                    ``(A) In general.--In the case of an eligible 
                individual who has coverage under a high deductible 
                health plan, the monthly limitation for any month of 
                such coverage is \1/12\ of the lesser of--
                            ``(i) the sum of the annual deductible and 
                        the other annual out-of-pocket expenses (other 
                        than for premiums) required to be paid under 
                        the plan by the eligible individual for covered 
                        benefits, or
                            ``(ii) in the case of an eligible 
                        individual with--
                                    ``(I) self-only coverage, the 
                                dollar amount in effect under subclause 
                                (I) of subsection (c)(2)(A)(ii), or
                                    ``(II) family coverage, the dollar 
                                amount in effect under subclause (II) 
                                of subsection (c)(2)(A)(ii).
                    ``(B) Special rules relating to out-of-pocket 
                expenses.--
                            ``(i) Reduction for separate plan.--The 
                        annual out-of-pocket expenses taken into 
                        account under subparagraph (A)(i) with respect 
                        to any eligible individual shall be reduced by 
                        any out-of-pocket expense payable under a 
                        separate plan covering the individual.
                            ``(ii) Secretarial authority.--The 
                        Secretary may by regulations provide that 
                        annual out-of-pocket expenses will not be taken 
                        into account under subparagraph (A)(i) to the 
                        extent that there is only a remote likelihood 
                        that such amounts will be required to be 
                        paid.''.
            (2) Application of special rules for married individuals.--
        Paragraph (5) of section 223(b) of such Code (relating to 
        limitations) is amended to read as follows:
            ``(5) Special rules for married individuals.--
                    ``(A) In general.--In the case of individuals who 
                are married to each other and who are both eligible 
                individuals, the limitation under paragraph (1) for 
                each spouse shall be equal to the spouse's applicable 
                share of the combined marital limit.
                    ``(B) Combined marital limit.--For purposes of 
                subparagraph (A), the combined marital limit is the 
                excess (if any) of--
                            ``(i) the lesser of--
                                    ``(I) subject to subparagraph (C), 
                                the sum of the limitations computed 
                                separately under paragraph (1) for each 
                                spouse (including any additional 
                                contribution amount under paragraph 
                                (3)), or
                                    ``(II) the dollar amount in effect 
                                under subsection (c)(2)(A)(ii)(II), 
                                over
                            ``(ii) the aggregate amount paid to Archer 
                        MSAs of such spouses for the taxable year.
                    ``(C) Special rule where both spouses have family 
                coverage under same plan.--For purposes of subparagraph 
                (B)(i)(I), if either spouse has family coverage which 
                covers both spouses, both spouses shall be treated as 
                having only such coverage (and if both spouses each 
                have such coverage under different plans, shall be 
                treated as having only family coverage with the plan 
                with respect to which the lowest amount is determined 
                under paragraph (2)(A)(i)).
                    ``(D) Applicable share.--For purposes of 
                subparagraph (A), a spouse's applicable share is one-
                half of the combined marital limit unless both spouses 
                agree on a different division.
                    ``(E) Couples not married entire year.--The 
                Secretary shall prescribe rules for the application of 
                this paragraph in the case of any taxable year for 
                which the individuals were not married to each other 
                during all months included in the taxable year, 
                including rules which allow individuals in appropriate 
                cases to take into account coverage prior to marriage 
                in computing the combined marital limit for purposes of 
                this paragraph.''.
            (3) Self-only coverage.--Paragraph (4) of section 223(c) of 
        such Code (relating to definitions and special rules) is 
        amended to read as follows:
            ``(4) Coverage.--
                    ``(A) Family coverage.--The term `family coverage' 
                means any coverage other than self-only coverage.
                    ``(B) Self-only coverage.--If more than 1 
                individual is covered by a high deductible health plan 
                but only 1 of the individuals is an eligible 
                individual, the coverage shall be treated as self-only 
                coverage.''.
            (4) Conforming amendments.--
                    (A) Section 223(b)(3)(A) of such Code is amended by 
                striking ``subparagraphs (A) and (B) of''.
                    (B) Section 223(d)(1)(A)(ii)(I) of such Code is 
                amended by striking ``subsection (b)(2)(B)(ii)'' and 
                inserting ``subsection (c)(2)(A)(ii)(II)''.
                    (C) Clause (ii) of section 223(c)(2)(D) of such 
                Code is amended to read as follows:
                            ``(ii) Certain items disregarded in 
                        computing monthly limitation.--Such plan's 
                        annual deductible, and such plan's annual out-
                        of-pocket limitation, for services provided 
                        outside of such network shall not be taken into 
                        account for purposes of subsection (b)(2).''
                    (D) Paragraph (1) of section 223(g) of such Code is 
                amended to read as follows:
            ``(1) In general.--Each dollar amount in subsection 
        (c)(2)(A) shall be increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                such taxable year begins determined by substituting 
                `calendar year 1997' for `calendar year 1992' in 
                subparagraph (B) thereof.''.
    (d) Certain Health Reimbursement Arrangement Rollovers Permitted.--
            (1) Rollover from health reimbursement arrangement 
        permitted.--For purposes of the Internal Revenue Code of 1986, 
        a health reimbursement arrangement (as defined by rulings in 
        effect on the date of the enactment of this Act) shall not fail 
        to be treated as such an arrangement if such arrangement allows 
        for the distribution within 1 year after the last day of the 
        taxable year in which such date of enactment occurs of the 
        remaining balance (determined as of such last day) of the 
        amount to be received in reimbursements under such arrangement 
        into a health savings account established pursuant to section 
        223 of such Code for the benefit of the beneficiary of such 
        arrangement.
            (2) Rollover to health savings account permitted.--Section 
        223(f) of the Internal Revenue Code of 1986 (relating to tax 
        treatment of distributions) is amended by adding at the end the 
        following new paragraph:
            ``(9) Health reimbursement arrangement rollover 
        contribution.--
                    ``(A) In general.--An amount is described in this 
                paragraph as a rollover contribution if such amount is 
                described in section 2(c)(1) of the Tax-Free Healthcare 
                Savings, Access, and Portability Act and is paid or 
                distributed from a health reimbursement arrangement 
                established for the benefit of the account beneficiary 
                to a health savings account of such account 
                beneficiary. Any rollover contribution described in the 
                preceding sentence shall not be considered an employer 
                contribution for purposes of section 4980G.
                    ``(B) Tax treatment relating to contributions.--For 
                purposes of this title--
                            ``(i) Income tax.--Gross income shall not 
                        include the amount of any contribution under 
                        this paragraph.
                            ``(ii) Employment taxes.--Amounts 
                        contributed under this paragraph shall be 
                        treated as a payment described in section 
                        106(d).
                            ``(iii) Comparability excise tax.--Section 
                        4980G shall not apply to contributions made 
                        under this paragraph.''.
            (3) Conforming amendments.--
                    (A) Section 223(d)(1)(A) of such Code is amended by 
                inserting ``or (f)(9)'' after ``(f)(5)''.
                    (B) Section 223(f)(3)(B) of such Code is amended by 
                inserting ``or (9)'' after ``paragraph (5)''.
    (e) Effective Date.--The provisions of, and amendments made by, 
this section shall apply to taxable years beginning after December 31, 
2006.

SEC. 3. EXCEPTION TO REQUIREMENT FOR EMPLOYERS TO MAKE COMPARABLE 
              HEALTH SAVINGS ACCOUNT CONTRIBUTIONS.

    (a) Greater Employer-Provided Contributions to HSAs for Acutely or 
Chronically Ill Employees Treated as Meeting Comparability 
Requirements.--Subsection (b) of section 4980G of the Internal Revenue 
Code of 1986 (relating to failure of employer to make comparable health 
savings account contributions) is amended to read as follows:
    ``(b) Rules and Requirements.--
            ``(1) In general.--Except as provided in paragraph (2), 
        rules and requirements similar to the rules and requirements of 
        section 4980E shall apply for purposes of this section.
            ``(2) Treatment of employer-provided contributions to hsas 
        for acutely or chronically ill employees.--For purposes of this 
        section--
                    ``(A) In general.--Any contribution by an employer 
                to a health savings account of an employee who is (or 
                the spouse or any dependent of the employee who is) an 
                acutely or chronically ill individual in an amount 
                which is greater than a contribution to a health 
                savings account of a comparable participating employee 
                who is not an acutely or chronically ill individual 
                shall not fail to be considered a comparable 
                contribution.
                    ``(B) Nondiscrimination requirement.--Subparagraph 
                (A) shall not apply unless the excess employer 
                contributions described in subparagraph (A) are the 
                same for all acutely or chronically ill individuals who 
                are similarly situated.
                    ``(C) Acutely or chronically ill individual.--For 
                purposes of this paragraph, the term `acutely or 
                chronically ill individual' means any individual whose 
                qualified medical expenses for any taxable year (based 
                on age and health status) are more than 50 percent 
                greater than the average qualified medical expenses of 
                all employees of the employer for such year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2006.

SEC. 4. DEDUCTION OF PREMIUMS FOR HIGH DEDUCTIBLE HEALTH PLANS.

    (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 224 as 
section 225 and by inserting after section 223 the following new 
section:

``SEC. 224. PREMIUMS FOR HIGH DEDUCTIBLE HEALTH PLANS.

    ``(a) Deduction Allowed.--In the case of an individual, there shall 
be allowed as a deduction for the taxable year the aggregate amount 
paid by such individual as premiums under a high deductible health plan 
with respect to months during such year for which such individual is an 
eligible individual with respect to such health plan.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Eligible individual.--The term `eligible individual' 
        has the meaning given such term by section 223(c)(1).
            ``(2) High deductible health plan.--The term `high 
        deductible health plan' has the meaning given such term by 
        section 223(c)(2).
    ``(c) Special Rules.--
            ``(1) Deduction limits.--
                    ``(A) Deduction allowable for only 1 plan.--For 
                purposes of this section, in the case of an individual 
                covered by more than 1 high deductible health plan for 
                any month, the individual may only take into account 
                amounts paid for such month for the plan with the 
                lowest premium.
                    ``(B) Plans covering ineligible individuals.--If 2 
                or more individuals are covered by a high deductible 
                health plan for any month but only 1 of such 
                individuals is an eligible individual for such month, 
                only 50 percent of the aggregate amount paid by such 
                eligible individual as premiums under the plan with 
                respect to such month shall be taken into account for 
                purposes of this section.
            ``(2) Group health plan coverage.--
                    ``(A) In general.--No deduction shall be allowed to 
                an individual under subsection (a) for any amount paid 
                for coverage under a high deductible health plan for a 
                month if that individual participates in any coverage 
                under a group health plan (within the meaning of 
                section 5000 without regard to section 5000(d)).
                    ``(B) Exception for plans only providing 
                contributions to health savings accounts.--Subparagraph 
                (A) shall not apply to an individual if the 
                individual's only coverage under a group health plan 
                for a month consists of contributions by an employer to 
                a health savings account with respect to which the 
                individual is the account beneficiary.
                    ``(C) Exception for certain permitted coverage.--
                Subparagraph (A) shall not apply to an individual if 
                the individual's only coverage under a group health 
                plan for a month is coverage described in clause (i) or 
                (ii) of section 223(c)(1)(B).
            ``(3) Medical and health savings accounts.--Subsection (a) 
        shall not apply with respect to any amount which is paid or 
        distributed out of an Archer MSA or a health savings account 
        which is not included in gross income under section 220(f) or 
        223(f), as the case may be.
            ``(4) Coordination with deduction for health insurance of 
        self-employed individuals.--Any amount taken into account by 
        the taxpayer in computing the deduction under section 162(l) 
        shall not be taken into account under this section.
            ``(5) Coordination with medical expense deduction.--Any 
        amount taken into account by the taxpayer in computing the 
        deduction under this section shall not be taken into account 
        under section 213.''.
    (b) Deduction Allowed Whether or Not Individual Itemizes Other 
Deductions.--Section 62(a) of the Internal Revenue Code of 1986 
(defining adjusted gross income) is amended by inserting before the 
last sentence at the end the following new paragraph:
            ``(21) Premiums for high deductible health plans.--The 
        deduction allowed by section 224.''.
    (c) Coordination With Section 35 Health Insurance Costs Credit.--
Section 35(g)(2) of the Internal Revenue Code of 1986 (relating to 
coordination with other deductions) is amended by striking ``or 213'' 
and inserting ``, 213, or 224''.
    (d) Clerical Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 of the Internal Revenue Code of 1986 is 
amended by redesignating the item relating to section 224 as an item 
relating to section 225 and by inserting before such item the following 
new item:

``Sec. 224. Premiums for high deductible health plans.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 5. CREDIT FOR CERTAIN EMPLOYMENT TAXES PAID WITH RESPECT TO 
              PREMIUMS FOR HIGH DEDUCTIBLE HEALTH PLANS AND 
              CONTRIBUTIONS TO HEALTH SAVINGS ACCOUNTS.

    (a) Allowance of Credit.--Subpart C of part IV of subchapter A of 
chapter 1 of the Internal Revenue Code of 1986 (relating to refundable 
credits) is amended by redesignating section 36 as section 37 and by 
inserting after section 35 the following new section:

``SEC. 36. EMPLOYMENT TAXES PAID WITH RESPECT TO PREMIUMS FOR HIGH 
              DEDUCTIBLE HEALTH PLANS AND CONTRIBUTIONS TO HEALTH 
              SAVINGS ACCOUNTS.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this subtitle 
for the taxable year an amount equal to the product of--
            ``(1) the sum of the rates of tax in effect under sections 
        3101(a), 3101(b), 3111(a), and 3111(b) for the calendar year in 
        which the taxable year begins, multiplied by
            ``(2) the sum of--
                    ``(A) the aggregate amount paid by such individual 
                as premiums under a high deductible health plan which 
                is allowed as a deduction under section 224 for the 
                taxable year, and
                    ``(B) the aggregate amount paid to a health savings 
                account of such individual which is allowed as a 
                deduction under section 223 for the taxable year.
    ``(b) Credit Limited to Certain Employment Taxes.--
            ``(1) In general.--The credit allowed under subsection (a) 
        with respect to any individual for any taxable year shall not 
        exceed the specified employment taxes with respect to such 
        individual for such taxable year.
            ``(2) Specified employment taxes.--For purposes of this 
        subsection, the term `specified employment taxes' means, with 
        respect to any individual for any taxable year, the sum of--
                    ``(A) the taxes imposed under sections 3101(a), 
                3101(b), 3111(a), 3111(b), 3201(a), 3211(a), and 
                3221(a) (taking into account any adjustments or refunds 
                under section 6413) with respect to wages and 
                compensation received by such individual during the 
                calendar year in which such taxable year begins, and
                    ``(B) the taxes imposed under subsections (a) and 
                (b) of section 1401 with respect to the self-employment 
                income of such individual for such taxable year.
    ``(c) Special Rule for Employment Compensation in Excess of Social 
Security Contribution Base.--
            ``(1) In general.--If the aggregate amount of employment 
        compensation received by any individual during the calendar 
        year in which the taxable year begins exceeds the contribution 
        and benefit base (as determined under section 230 of the Social 
        Security Act), the amount of the credit determined under 
        subsection (a) (determined before application of subsection 
        (b)) shall be equal to the sum of--
                    ``(A) the amount determined under subsection (a) by 
                only taking into account so much of the amount 
                determined under subsection (a)(2) as does not exceed 
                such excess and by only taking into account the rates 
                of tax in effect under section 3101(b) and 3111(b), and
                    ``(B) the amount determined under subsection (a) by 
                only taking into account so much of the amount 
                determined under subsection (a)(2) as is not taken into 
                account under subparagraph (A) and by taking into 
                account each of the rates of tax referred to in 
                subsection (a)(1).
            ``(2) Employment compensation.--For purposes of this 
        subsection, the term `employment compensation' means, with 
        respect to any individual for any taxable year, the sum of--
                    ``(A) the wages (as defined in section 3121(a)) and 
                compensation (as defined in section 3231(e)) received 
                by such individual during the calendar year in which 
                such taxable year begins, and
                    ``(B) the self-employment income (as defined in 
                section 1402(b)) of such individual for such taxable 
                year.
    ``(d) Coordination With Other Deductions.--Amounts taken into 
account under this section shall not be taken into account in 
determining any deduction allowed under section 162(l), 223, or 224.''.
    (b) Conforming Amendments.--
            (1) Paragraph (2) of section 1324(b) of title 31, United 
        States Code, is amended by inserting ``or section 36'' after 
        ``section 35''.
            (2) The table of sections for subpart C of part IV of 
        subchapter A of chapter 1 of the Internal Revenue Code of 1986 
        is amended by striking the item relating to section 36 and by 
        inserting after the item relating to section 35 the following 
        new items:

``Sec. 36. Employment taxes paid with respect to premiums for high 
                            deductible health plans and contributions 
                            to health savings accounts.
``Sec. 37. Overpayments of tax.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 6. HSA-QUALIFIED INSURANCE PORTABILITY.

    (a) Deductibility of Future Conversion Premiums.--Section 
213(d)(1)(D) of the Internal Revenue Code of 1986 (defining medical 
care) is amended by inserting ``and also including amounts paid to an 
insurer for the right to the future purchase of insurance under certain 
terms agreed to at the time of the payment'' after ``for the aged''.
    (b) Allowance of Taxable Employer Contributions to Individual 
Market HSA-Qualified Health Insurance for Employees.--
            (1) HIPAA.--Section 9832(a) of the Internal Revenue Code of 
        1986 (defining group health plan) is amended by adding at the 
        end the following new sentence: ``For purposes of the preceding 
        sentence, an arrangement shall not constitute a group health 
        plan to the extent that it is a high deductible health plan 
        within the meaning of section 223 (or is a payment by an 
        employer or employee organization with respect to such plan), 
        if the plan constitutes individual health insurance, as 
        determined by regulations issued by the Secretary, 
        notwithstanding that an employer or employee organization 
        negotiates the cost or benefits of the plan.''.
            (2) COBRA.--Section 4980B(g)(2) of such Code is amended by 
        inserting ``and such term shall not include an arrangement to 
        the extent that it is a high deductible health plan within the 
        meaning of section 223 (or is a payment by an employer or 
        employee organization with respect to such plan), if the plan 
        constitutes individual health insurance, as determined by 
        regulations issued by the Secretary, notwithstanding that an 
        employer or employee organization negotiates the cost or 
        benefits of the plan'' after ``section 7702B(c))''.
            (3) ERISA.--Section 4 of the Employee Retirement Income 
        Security Act of 1974 is amended--
                    (A) by striking ``subsection (b) or (c)'' in 
                subsection (a) and inserting ``subsection (b), (c), or 
                (d)'', and
                    (B) by adding at the end the following new 
                subsection:
    ``(d) The provisions of this title shall not apply to--
            ``(1) a high deductible health plan within the meaning of 
        section 223 of the Internal Revenue Code of 1986, or any 
        payment by an employer or employee organization with respect to 
        such plan, if the plan constitutes individual health insurance, 
        as determined by regulations issued by the Secretary of the 
        Treasury, and notwithstanding that an employer or employee 
        organization negotiates the cost or benefits of the plan; or
            ``(2) any health savings account within the meaning of 
        section 223 of the Internal Revenue Code of 1986.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.
                                 <all>