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.

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.

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.

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:

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.

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:

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.

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.