II 110th CONGRESS 2d Session S. 2743 IN THE SENATE OF THE UNITED STATES March 11, 2008 Mr. Casey (for himself and Mr. Hatch) 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 provide for the establishment of financial security accounts for the care of family members with disabilities, and for other purposes.

1.

Short title

This Act may be cited as the Financial Security Accounts for Individuals with Disabilities Act of 2008.

2.

Financial security accounts for individuals with disabilities

(a)

Establishment

(1)

In general

Subchapter F of chapter 1 of the Internal Revenue Code of 1986 (relating to exempt organizations) is amended by inserting after part VIII the following new part: IX

Savings for individuals with disabilities

Sec. 530A. Financial security accounts for individuals with disabilities.

530A.

Financial security accounts for individuals with disabilities

(a)

General rule

A financial security account for an individual with a disability shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such account shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations). (b)

Definitions and special rules

For purposes of this section— (1)

Financial security account for an individual with a disability

The term financial security account for an individual with a disability means a trust created or organized in the United States (and designated as a financial security account for an individual with a disability at the time created or organized) exclusively for the purpose of paying qualified disability expenses of an individual who is disabled and who is the designated beneficiary of the trust, but only if the written governing instrument creating the trust meets the following requirements: (A)No contribution will be accepted— (i)except in the case of rollover contributions described in subsection (c)(4) and sections 223(c)(5)(A)(ii), 408(d)(3)(A)(iii), 529(c)(3)(E), and 530(d)(9)— (I)unless it is in cash, and (II)if such contribution would result in aggregate contributions for the taxable year and all preceding taxable years exceeding $500,000, and (ii)after the date on which the account holder attains the age of 65. (B)The trustee is a bank (as defined in section 408(n)), a parent or guardian of the designated beneficiary, a designee of a parent or guardian of the designated beneficiary, the designated beneficiary, or another person, who demonstrates to the satisfaction of the Secretary that the manner in which that 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 shall not be commingled with other property except in a common trust fund or common investment fund. (2)

Qualified disability expenses

The term qualified disability expenses means, with respect to an individual with a disability, amounts paid or incurred, not compensated for by insurance or otherwise, for— (A)education, medical and dental care, community based support services, employment training and support, moving, and assistive technology, (B)after the designated beneficiary has attained the age of 18, housing and transportation, and (C)funeral and burial services and property. (3)

Individual with a disability

An individual is an individual with a disability if such individual is receiving supplemental security income benefits under title XVI of the Social Security Act or an individual otherwise eligible to receive such benefits notwithstanding the income and assets tests required for eligibility for such benefits. (4)

Rules relating to estate and gift tax

Rules similar to the rules of paragraphs (2), (4), and (5) of section 529(c) shall apply for purposes of this section. (5)

Only 1 account per qualified beneficiary

No individual may have more than 1 financial security account for an individual with a disability. (c)

Tax treatment of distributions

(1)

In general

Except as otherwise provided in this subsection, any amount paid or distributed out of a financial security account for an individual with a disability shall be included in gross income by the payee or distributee, as the case may be, for the taxable year in which received in the manner as provided in section 72. (2)

Distributions for benefit of designated beneficiary

(A)

In general

No amount shall be includible in gross income under paragraph (1) if the qualified disability expenses of the designated beneficiary during the taxable year are not less than the aggregate distributions during the taxable year. (B)

Distributions in excess of expenses

If such aggregate distributions exceed such expenses during the taxable year, the amount otherwise includible in gross income under paragraph (1) shall be reduced by the amount which bears the same ratio to the amount which would be includible in gross income under paragraph (1) (without regard to this subparagraph) as the qualified disability expenses bear to such aggregate distributions. (C)

Disallowance of excluded amounts as deduction, credit, or exclusion

No deduction, credit, or exclusion shall be allowed to the taxpayer under any other section of this chapter for any qualified disability expenses to the extent taken into account in determining the amount of the exclusion under this paragraph. (3)

Additional tax for distributions not used for benefit of designated beneficiary

(A)

In general

The tax imposed by this chapter for any taxable year on any taxpayer who receives a payment or distribution from a financial security account for an individual with a disability shall be increased by 10 percent of the amount thereof which is includible in gross income under paragraph (1). (B)

Exception

Subparagraph (A) shall not apply if the payment or distribution is made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. (C)

Contributions returned before certain date

Subparagraph (A) shall not apply to the distribution of any contribution made during a taxable year if— (i)such distribution is made before the first day of the sixth month of the taxable year following the 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 gross income for the taxable year in which such excess contribution was made.(4)

Rollovers

Paragraph (1) shall not apply to any amount paid or distributed from a financial security account for an individual with a disability to the extent that the amount received is paid, not later than the 60th day after the date of such payment or distribution, into another financial security account for an individual with a disability for the benefit of the same beneficiary. The preceding sentence shall not apply to any payment or distribution if it applied to any prior payment or distribution during the 12-month period ending on the date of the payment or distribution. (5)

Change in beneficiary

Any change in the beneficiary of a financial security account for an individual with a disability shall not be treated as a distribution for purposes of paragraph (1) if the new beneficiary is disabled and is a member of the family (as defined in section 529(e)(2)) of the old beneficiary. (d)

Tax treatment of accounts

Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to any financial security account for an individual with a disability. (e)

Community property laws

This section shall be applied without regard to any community property laws. (f)

Custodial accounts

For purposes of this section, a custodial account shall be treated as a trust if— (1)the assets of such account are held by a bank (as defined in section 408(n) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and (2)the custodial account would, except for the fact that it is not a trust, constitute an account described in subsection (c)(1). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.(g)

Reports

The trustee of a financial security account for an individual with a disability shall make such reports regarding such account to the Secretary and to the beneficiary of the account with respect to contributions, distributions, and such other matters as the Secretary may require. 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. (h)

Inflation adjustment

(1)

In general

In the case of any taxable year beginning after 2008, the $500,000 dollar amount under subsection (b)(1)(A)(ii) 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 the taxable year begins, determined by substituting calendar year 2007 for calendar year 1992 in subparagraph (B) thereof. (2)

Rounding

If any amount as adjusted under paragraph (1) is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000. (i)

Regulations

The Secretary, in consultation with the Secretary of Health and Human Services, shall prescribe regulations to carry out the purposes of this section, including regulations— (1)to ensure that individuals do not have more than 1 financial security account for an individual with a disability, and (2)to prevent fraud and abuse with respect to amounts claimed as qualified disability expenses.

. (2)

Conforming amendments

(A)

Penalty for failure to meet minimum distribution requirement

Subsection (c) of section 4974 of such Code is amended by striking or at the end of paragraph (4), by striking the period at the end of paragraph (5) and inserting , or, and by inserting after paragraph (5) the following new paragraph: (6)any financial security account for an individual with a disability (as defined in section 530A(b)). . (B)

Tax on prohibited transactions

(i)

In general

Paragraph (1) of section 4975(e) of such Code (defining plan) is amended by redesignating subparagraph (G) as subparagraph (H), by striking or at the end of subparagraph (F), and by adding after subparagraph (F) the following: (G)a financial security account for an individual with a disability described in section 530A, or . (ii)

Exemption

Subsection (d) of section 4975 of such Code (relating to exemptions) is amended by striking or at the end of paragraph (22), by striking the period at the end of paragraph (23) and inserting ; or, and by inserting after paragraph (23) the following: (24)in the case of a financial security account for an individual with a disability, any transaction to provide housing or other services by a family member to or for the designated beneficiary of the trust to the extent that such transaction does not exceed the fair market value of the housing or service (as the case may be) provided. . (iii)

Special rule

Subsection (c) of section 4975 of such Code (relating to tax on prohibited transactions) is amended by adding at the end the following new paragraph: (7)

Special rule for financial security account for individuals with disabilities

An individual for whose benefit a financial security account for an individual with a disability is established and any contributor to such account 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 530A(d) applies with respect to such transaction. . (C)

Rollovers from certain other tax favored accounts

(i)

Qualified tuition programs

Paragraph (3) of section 529(c) of such Code is amended by adding at the end the following new subparagraph: (E)

Contributions to financial security account for an individual with a disability

Subparagraph (A) shall not apply to that portion of any distribution which, within 60 days of such distribution, is contributed to a financial security account for an individual with a disability for the benefit of the designated beneficiary. . (ii)

Education savings accounts

Subsection (d) of section 530 of such Code is amended by adding at the end the following new paragraph: (9)

Contributions to financial security account for an individual with a disability

Paragraph (1) shall not apply to any amount paid or distributed from a Coverdell education savings account to the extent that the amount received is paid, not later than the 60th day after the date of such payment or distribution, into a financial security account for an individual with a disability for the benefit of the same beneficiary. . (iii)

Health savings accounts

Subparagraph (A) of section 223(f)(5) is amended— (I)by inserting (i) before into a health savings account, and (II)by inserting or (ii) into a financial security account for an individual with a disability for the benefit of such beneficiary before not later than the 60th day. (iv)

Certain IRAs

Subparagraph (A) of section 408(d)(3) is amended by striking or at the end of clause (i), by striking the period at the end of clause (ii) and inserting ; or, and by inserting after clause (ii) the following new clause: (iii)the entire amount received (including money and other property) is paid into a financial security account for an individual with a disability for the benefit of the child or grandchild of such individual not later than the 60th day after the day on which the payment or distribution is received. . (D)

Reports

Paragraph (2) of section 6693(a) of such Code is amended by striking and at the end of subparagraph (D), by striking the period at the end of subparagraph (E) and inserting and, and by inserting after subparagraph (E) the following new subparagraph: (F)section 530A(g) (relating to financial security accounts for individuals with disabilities). . (E)

Exclusion from income

Subsection (b) of section 1612 of the Social Security Act (42 U.S.C. 1382a) is amended by striking or at the end of paragraph (22), by striking the period at the end of paragraph (23) and inserting ; or, and by inserting after paragraph (23) the following: (24)any contribution to a financial security account for an individual with a disability. . (F)

Clerical amendment

The table of parts for subchapter F of chapter 1 of such Code is amended by inserting after the item relating to part VIII the following new item: Part IX. Savings for individuals with disabilities. . (b)

Deduction for contributions to financial security accounts for individuals with disabilities

(1)

In general

Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by redesignating section 224 as section 225 and inserting after section 223 the following new section:

224.

Contributions to financial security accounts for individuals with disabilities

(a)

Allowance of deduction

In the case of an individual, there shall be allowed as a deduction an amount equal to the amount paid in cash for the taxable year by or on behalf of such individual to a financial security account for an individual with a disability (as defined in section 530A(b)(1)) for the benefit of such individual's child, grandchild, brother, or sister. (b)

Limitations

(1)

In general

The amount allowable as a deduction under subsection (a) for any taxable year shall not exceed $2,000. (2)

Cost-of-living adjustment

(A)

In general

In the case of any taxable year beginning after 2008, the $2,000 amount under subparagraph (A) shall be increased by an amount equal to— (i)such dollar amount, multiplied by (ii)the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting calendar year 2007 for calendar year 1992 in subparagraph (B) thereof. (B)

Rounding

If any amount after adjustment under the preceding sentence is not a multiple of $200, such amount shall be rounded to the next lowest multiple of $200. (3)

Reduction based on adjusted gross income

The dollar limitation under paragraph (1) for such taxable year shall be reduced (but not below zero) by the amount determined under section 219(g)(2).

. (2)

Clerical amendment

The table of sections for part VII of subchapter B of chapter 1 of such Code is amended by redesignating the item relating to section 224 as relating to section 225 and by inserting after the item relating to section 223 the following new item: Sec. 224. Contributions to financial security accounts for individuals with disabilities. . (c)

Annual reports

(1)

In general

The Secretary of the Treasury, in consultation with the Secretary of Health and Human Services, shall report annually to Congress on the usage of financial security accounts for individuals with disabilities under section 530A of the Internal Revenue Code of 1986. (2)

Contents of report

Any report under paragraph (1) shall include— (A)the number of people with a financial security account for an individual with a disability, (B)the total amount of contributions to such accounts and the number of individuals claiming the deduction allowed under section 224 of the Internal Revenue Code of 1986, as added by subsection(b), and the total amount of such deductions, (C)the total amount and nature of distributions from such accounts, and (D)issues relating to the abuse of such accounts, if any. (d)

Effective date

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

3.

Treatment of financial security accounts for individuals with disabilities under certain federal programs

(a)

Treatment as a medicaid excepted trust

Paragraph (4) of section 1917(d) of the Social Security Act (42 U.S.C. 1396p(d)(4)) is amended by adding at the end the following new subparagraph: (D)A trust which is a financial security account for an individual with a disability described in section 530A(b)(1) of the Internal Revenue Code of 1986. . (b)

Account funds disregarded for purposes of certain other means-tested Federal programs

Notwithstanding any other provision of Federal law that requires consideration of 1 or more financial circumstances of an individual, for the purpose of determining eligibility to receive, or the amount of, any assistance or benefit authorized by such provision to be provided to or for the benefit of such individual, any amount (including earnings thereon) in any financial security account for an individual with a disability of such individual, and any distribution for qualified disability expenses (as defined in section 530A(b)(2)) shall be disregarded for such purpose with respect to any period during which such individual maintains, makes contributions to, or receives distributions from such financial security account.