Short title, etc

(a)

Short title

This Act may be cited as the

HSA Improvement and Expansion Act of 2007

. (b)

Amendment of 1986 Code

Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986. (c)

Table of contents

The table of contents is as follows:

Sec. 1. Short title, etc.

Sec. 2. Health reimbursement arrangements and spending arrangements in combination with health savings accounts.

Sec. 3. Increase in annual HSA contribution limitation.

Sec. 4. Purchase of health insurance from HSA account.

Sec. 5. Special rule for certain medical expenses incurred before establishment of account.

Sec. 6. Provisions relating to Medicare.

Sec. 7. Individuals eligible for veterans benefits for a service-connected disability.

Sec. 8. Allow both spouses to make catch-up contributions to the same HSA account.

Sec. 9. FSA and HRA Termination to fund HSAs.

Health reimbursement arrangements and spending arrangements in combination with health savings accounts

(a)

In general

Subparagraph (B) of section 223(c)(1) (relating to certain coverage disregarded) is amended by striking and at the end of clause (ii), by striking the period at the end of clause (iii) and inserting , and, and by inserting after clause (iii) the following new clause:

(iv)coverage under a flexible spending arrangement or a health reimbursement arrangement, or both, which meets the requirements of paragraph (6).

(b)

Combination health reimbursement, savings, and spending arrangements

Subsection (c) of section 223 (relating to definitions and special rules) is amended by adding at the end the following new paragraph:

(6)

Combined limit for contributions or credits to health reimbursement, arrangements and spending arrangements

(A)

In general

In the case of coverage under a flexible spending arrangement or a health reimbursement arrangement, or both, such coverage meets the requirements of this paragraph if, with respect to an individual— (i)the sum of— (I)the amount allowable as a deduction under subsection (a), (II)the salary reduction amount elected by the individual and, if applicable, the employer contribution or credit allocated to the individual for the taxable year under the flexible spending arrangement (as defined in section 106(c)(2)), plus (III)the amounts that the individual is permitted, under the terms of the plan, to receive in reimbursements for the taxable year under the health reimbursement arrangement, does not exceed (ii)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. (B)

Exceptions for disregarded coverage

For purposes of subparagraph (A)— (i)

Certain flexible spending arrangements

Any flexible spending arrangement salary reduction amounts or employer contributions or credits that are restricted by the employer to use for coverage described in paragraph (1)(B) shall not be taken into account under subparagraph (A)(i)(II). (ii)

Certain health reimbursement arrangements

Any reimbursements from a health reimbursement arrangement for coverage described in paragraph (1)(B) shall not be taken into account under subparagraph (A)(i)(III). (iii)

Qualified HSA distributions from FSA and HRA terminations

Any qualified HSA distribution (as defined in section 106(e)) shall not be taken into account under subparagraph (A)(i). (C)

Termination

Coverage shall not be treated as meeting the requirements of this paragraph for any taxable year beginning after December 31, 2012.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

Increase in annual HSA contribution limitation

(a)

In general

Paragraph (2) of section 223(b) (relating to monthly limitation) is amended— (1)in subparagraph (A) by striking $2,250 and inserting $4,500, and (2)in subparagraph (B) by striking $4,500 and inserting $9,000. (b)

Cost-of-living adjustment

Section 223(g)(1)(B)(i) is amended by striking calendar year 1997 and inserting calendar year 2007. (c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

Purchase of health insurance from HSA account

(a)

In general

Paragraph (2) of section 223(d) (defining qualified medical expenses) is amended— (1)by striking subparagraphs (B) and (C), (2)in subparagraph (A) by striking

(A) In general.—

and moving the text 2 ems to the left, and (3)by inserting and including payment for insurance) after section 213(d). (b)

Effective date

The amendments made by this section shall apply with respect to insurance purchased after the date of the enactment of this Act in taxable years beginning after such date.

Special rule for certain medical expenses incurred before establishment of account

(a)

In general

Subsection (d) of section 223, as amended by section 4, is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

(4)

Certain medical expenses incurred before establishment of account treated as qualified

(A)

In general

For purposes of paragraph (2), 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 during the 60-day period beginning on the date on which the high deductible health plan is first effective. (B)

Special rules

For purposes of subparagraph (A)— (i)an individual shall be treated as an eligible individual for any portion of a month for which 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, and (ii)the effective date of the health savings account is deemed to be the date on which the high deductible health plan is first effective after the date of the enactment of this paragraph.

(b)

Effective date

The amendment made by this section shall apply with respect to insurance purchased after the date of the enactment of this Act in taxable years beginning after such date.

Provisions relating to Medicare

(a)

Individuals over age 65 only enrolled in Medicare Part A

Section 223(b)(7) (relating to contribution limitation on Medicare eligible individuals) is amended by adding at the end the following new sentence: This paragraph shall not apply to any individual during any period the individual’s only entitlement to such benefits is an entitlement to hospital insurance benefits under part A of title XVIII of such Act pursuant to an enrollment for such hospital insurance benefits under section 226(a)(1) of such Act.. (b)

Medicare beneficiaries participating in Medicare Advantage MSA may contribute their own money to their MSA

Subsection (b) of section 138 is amended by striking paragraph (2) and redesignating paragraphs (3) and (4) as paragraphs (2) and (3), respectively. (c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

Individuals eligible for veterans benefits for a service-connected disability

(a)

In general

Section 223(c)(1) (defining eligible individual) is amended by adding at the end the following new subparagraph:

(D)

Special rule for individuals eligible for certain veterans benefits

For purposes of subparagraph (A)(ii), an individual shall not be treated as covered under a health plan described in such subparagraph merely because the individual receives periodic hospital care or medical services for a service-connected disability under any law administered by the Secretary of Veterans Affairs but only if the individual is not eligible to receive such care or services for any condition other than a service-connected disability.

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

Allow both spouses to make catch-up contributions to the same HSA account

(a)

In general

Paragraph (3) of section 223(b) is amended by adding at the end the following new subparagraph:

(C)

Special rule where both spouses are eligible individuals with 1 account

If— (i)an individual and the individual’s spouse have both attained age 55 before the close of the taxable year, and (ii)the spouse is not an account beneficiary of a health savings account as of the close of such year,

the additional contribution amount shall be 200 percent of the amount otherwise determined under subparagraph (B).

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

FSA and HRA Termination to fund HSAs

(a)

Grace period not required

Section 106(e)(2) of the Internal Revenue Code of 1986 is amended by adding at the end the following new sentence: A distribution shall not fail to be treated as a qualified HSA distribution merely because the balance in such arrangement is determined without regard to the requirement that unused amounts remaining at the end of a plan year must be forfeited in the absence of a grace period.. (b)

Deposit in limited FSA or HRA of funds in excess FSA or HRA termination distribution

Paragraph (1) of section 106(e) of such Code is amended by inserting before the period at the end thereof the following: and the deposit of funds in excess of a qualified HSA distribution amount into a health flexible spending account or health reimbursement arrangement which is compatible with a health savings account and which, on the date of such distribution, is a part of the employer’s plan. (c)

Disclaimer of disqualifying coverage

Subparagraph (B) of section 223(c)(1) of such Code is amended by striking and at the end of clause (ii), by striking the period at the end of clause (iii) and inserting , and, and by inserting after clause (iii) the following new clause:

(iv)any coverage (whether actual or prospective) otherwise described in subparagraph (A)(ii) which is disclaimed at the time of the creation or organization of the health savings account.

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.