[Congressional Record Volume 152, Number 85 (Tuesday, June 27, 2006)]
[Senate]
[Pages S6580-S6584]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH:
  S. 3585. A bill to amend the Internal Revenue Code of 1986 to improve 
and expand the availability of health savings accounts, and for other 
purposes; to the Committee on Finance.
  Mr. HATCH. Mr. President, I rise today to introduce the Health 
Savings Accounts Improvement and Expansion Act of 2006. This bill will 
make it easier for businesses to provide the option of an HSA to their 
employees and for Americans to elect these plans.
  In short, this bill will make it more likely that Americans will have 
an HSA plan available when they are making their health care choices. 
This would be a good development for the individual consumer and the 
for nation's health care system as a whole.
  There is one thing on which we can all agree: our current health care 
system is broken. Health care expenses are far outpacing inflation. 
These escalating costs are pricing more and more Americans and small 
businesses out of the health insurance market. Unless we act, our 
health care costs are on pace to bankrupt the Federal Treasury.
  We need to do something.
  The American people want us to do something.
  Some favor an option that would give the Federal Government more 
control of the health care system. In my opinion, that doesn't really 
fix the problem, it only makes the problem worse--leading to higher 
costs, higher taxes, and decreased quality and availability.
  I believe the answer lies in bringing down costs by helping Americans 
to take control of their health care.
  Recognizing that a federally controlled universal system is a 
nonstarter, the House of Representatives has aggressively pursued the 
expansion and development of Health Savings Accounts. In particular, 
Congressmen Eric Cantor and Bill Shuster have taken laudable steps 
toward making these plans more readily available for American workers.
  Congressman Bill Thomas, chairman of the Ways and Means Committee, is 
demonstrating his and the House's commitment to these plans by holding 
a hearing tomorrow to discuss the development of health savings 
accounts.
  I am also proud to see that several of our Senate colleagues have 
introduced legislation that would expand consumer driven health care. 
Senators Santorum, Allen, DeMint, Ensign, and Coburn have introduced 
legislation to fuel the growth of health savings accounts.
  My bill complements these plans by encouraging employers to offer HSA 
accounts and by making it easier for workers to use them.
  Since Congress established HSAs in 2004, American workers have turned 
to them as an affordable health care alternative. Already, more than 
three million people have enrolled in HSAs. Without any changes to the 
law, it is estimated that by 2008 there will be six million HSA owners 
with almost $5 billion in assets.
  HSAs are popular. And they are popular because they work.
  HSAs are a different type of health insurance. They are more like car 
insurance than traditional health insurance: You pay for the dents and 
dings yourself, and your insurance only kicks in for major events. This 
makes sense. Think of how expensive your car insurance would be if 
every scratch on every bumper had to be paid for by insurance companies 
with no owner contribution.
  Yet critics allege that promoting this type of insurance unfairly 
burdens older Americans and the chronically ill--those with the most 
health care needs. I would note that the premise of this argument is 
off the mark. For many Americans and businesses, the cost of health 
insurance premiums are rising so astronomically that the choice is not 
between traditional first-dollar coverage or an HSA plan, but between 
an HSA plan and no insurance at all.
  As the Galen Institute--a research institute that has done excellent 
work reviewing the development of consumer-driven health care--has 
shown, HSAs are not only for the young and the healthy, but also for 
all health consumers along the age and income spectrum. In a survey by 
eHealthInsurance--an on-line health insurance broker representing more 
than 140 major health insurance companies--40 percent of HSA-eligible 
plan

[[Page S6581]]

purchasers made less than $50,000. Forty-five percent of purchasers are 
over age 40 and 19 percent are 50 or older.
  Some argue that the healthy will migrate from traditional plans, 
leaving only the chronically ill in full coverage plans and driving up 
costs by shrinking the insurance pool. This argument ignores a critical 
fact. Younger workers aged 25-34 are currently the largest segment of 
the uninsured, in large part because insurance coverage is so 
expensive. They represent 23 percent of the total uninsured population. 
By bringing them into HSA plans, they will only bring premium costs 
down further for the chronically ill who establish an HSA.
  According to America's health insurance plans, AHIP, 37 percent of 
those purchasing plans were previously uninsured. Twenty-seven percent 
of policies sold in the small group market were sold to employers who 
did not previously offer coverage. According to Assurant Health, the 
leading health insurer for individuals and small groups, 40 percent of 
those purchasing HSAs were previously uninsured.
  Finally, it seems that American workers, and the chronically ill, are 
responding to the incentives provided by these consumer-driven plans. 
McKinsey & Company conducted an extensive survey of these plans. They 
held focus groups, performed one-on-one interviews, and produced an in-
depth study of more than 2,500 Americans regarding their health 
insurance arrangements. They concluded that these plans have a lot of 
potential. In fact, some of their conclusions were remarkable. Fifty 
percent were more likely to ask about costs and three times more likely 
to choose a less extensive and expensive treatment option. HSA owners 
are also more likely to visit an urgent care center for treatment 
rather than a hospital emergency room.
  In addition, HSA consumers were more likely to be attentive to their 
health. Twenty-five percent were more likely to engage in healthy 
behavior and 30 percent were more likely to get an annual physical. 
These educated consumers understand that prevention will save them 
money in the long run. They were more likely to identify treatment 
options and they were 20 percent more likely to comply with treatment 
for chronic conditions.
  It is no surprise that people are enjoying their HSA plans. According 
to a survey by eHealthInsurance, premiums for HSA-eligible insurance 
actually dropped between the introduction of these plans in 2004 and 
the first half of 2005. Nearly two-thirds of HSA purchasers paid $100 a 
month or less for their plans. And these plans are comprehensive. Most 
cover 100 percent of the costs of hospitalization, lab tests, emergency 
room visits, prescription drugs and doctors' visits after the 
deductible is met.
  The continued expansion of HSAs will have a twofold effect. For those 
with insurance, the high deductible encourages more responsible, and 
less wasteful, health care decisions. For those without insurance, the 
wider availability and lower premiums makes it more affordable for 
individuals to purchase these plans in the nongroup market and for 
companies to provide insurance for their employees. The bottom line is 
that the expansion of these plans will create downward pressure on 
escalating health care costs.

  My proposal aims to make HSAs more attractive to employees, more 
attractive to employers, and more attractive to older workers. And the 
bill provides innovative ways for younger workers to contribute seed 
money to fund an account for their family.
  For employees, the primary benefits are increased contribution 
limits, and the ability to pay their health insurance premiums from the 
HSA--with pre-tax dollars. Presently, the portion of premiums paid out-
of-pocket is paid with after-tax dollars. This feature will make HSAs 
affordable for more low and moderate income individuals.
  For employers, the bill provides incentives to move into low-cost 
premium arrangements. The health care costs of self-employed 
individuals and small employers who purchase plans in the non-group 
market should go down for those who avail themselves of these improved 
HSAs.
  For older Americans, this bill will permit contributions to an HSA as 
long as they continue to work. Today, more and more Americans are 
working past the age of 65. This is a trend we should encourage, 
because the labor force of the future will need more of these 
experienced workers. Senior citizens contribute a great deal to the 
workplace and our economy. I know that they are in Utah. Yet I hear 
from many of our older workers that because they are eligible for 
Medicare, they are ineligible for HSAs. Expanding contributions to a 
population that generally has more medical expenses makes sense.
  The cornerstone of my bill is a provision that allows HSAs to be 
funded with tax-free transfers of balances from other health or 
retirement plans. Participation in certain employer-sponsored health 
plans makes it impossible for employees to contribute to an HSA. For 
example, health reimbursement arrangements--HRAs--are plans that allow 
employers to reimburse substantiated employee medical expenses up to a 
maximum amount. Under current law, participation in an HRA disqualifies 
an individual from contributing to an HSA and remaining balances are 
subject to forfeiture.
  I believe that employers that have adopted HRAs would be more likely 
to offer HSAs if they are allowed a one-time opportunity to transfer 
individual HRA balances into HSAs. Allowing a one-time conversion 
opportunity would be very valuable for employees because the balances 
currently in HRAs would become employee-owned. Not only will this 
encourage responsible spending on health care, but it will also help to 
make health insurance more portable, a goal that discourages job lock 
and creates more freedom and opportunity for American workers.
  The bill provides for a tax-free transfer of IRA funds, originally 
allocated for retirement, to an HSA, with the money reallocated for 
health care expenses. This will be particularly helpful for those in 
need of initial seed money to open an HSA and for those who anticipate 
high medical expenses for which they are currently unable to tap IRA 
funds without penalty.
  My proposal will make it easier for veterans to participate in an 
HSA. According to Treasury Department guidance, a veteran may not 
contribute to an HSA if he or she has actually received medical 
benefits from the VA at any time during the previous 3 months. This 
bill would allow a veteran who receives VA medical benefits for a 
service-connected disability to be eligible for an HSA.
  I am pleased to tell my colleagues that the changes proposed by the 
Health Savings Accounts Improvement and Expansion Act of 2006 have been 
endorsed by a broad cross-section of major health care organizations. I 
am proud that the National Association of Health Underwriters, the 
American Benefits Council, the Council of Insurance Agents and Brokers, 
Assurant Health, the Chamber of Commerce, the National Business Group 
on Health, the Business Roundtable, and the Financial Services 
Roundtable have all endorsed my attempt to expand the availability of 
Health Savings Accounts. These groups know how important HSAs are in 
giving employees and employers the flexibility to meet their health 
care needs.
  Mr. President, I expect the popularity of HSAs will one day elevate 
the acronym to the level of IRAs, where no further clarification is 
required. Today, I ask my colleagues to join me in a bipartisan effort 
to accelerate that process by enacting this important legislation.
  I ask unanimous consent that a section-by-section description of the 
bill be printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows.

                                S. 3585

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

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``HSA 
     Improvement and Expansion Act of 2006''.
       (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.

     SEC. 2. FINDINGS.

       The Congress finds the following:

[[Page S6582]]

       (1) The Medicare Prescription Drug, Improvement, and 
     Modernization Act of 2003 (Public Law 108-173) authorizes 
     health savings accounts (referred to in this section as 
     ``HSAs'') into which individuals may make annual 
     contributions of not more than $2,700, and families may make 
     annual contributions of not more than $5,450, to permit 
     spending by individuals for their health care needs.
       (2) Federal law provides for obtaining health insurance 
     coverage through a low premium health plan offered with a 
     tax-favored HSA that typically costs substantially less than 
     traditional health insurance.
       (3) Giving individuals more direct control over their 
     health care spending will encourage more prudent use of 
     health care services, help make the health care system more 
     responsive to the needs of consumers, and improve access to 
     health coverage for the uninsured.
       (4) A broad range of improvements to the Federal laws 
     governing HSAs are necessary to make them more attractive to 
     consumers and employers.
       (5) The number of people covered in January 2006 by 
     products combining an HSA with a low premium health plan was 
     3,168,000, more than triple the 1,031,000 reported in March 
     2005.
       (6) HSAs have become an important option for consumers and 
     employers who have struggled to afford health insurance 
     coverage.
       (7) According to a January 2006 census, 31 percent of new 
     enrollees in HSAs and low premium health plans in the 
     individual market were previously uninsured.
       (8) HSAs combined with low premium health plans can provide 
     an affordable and accessible health insurance option for 
     individuals of all ages.
       (9) 50 percent of all people covered by HSAs and low 
     premium health plans in the individual market, including 
     dependents covered under family plans, are 40 years of age or 
     older.
       (10) Many States currently have in effect laws and 
     regulations that require insurers to provide specific benefit 
     coverage in the health insurance plans they offer, preventing 
     individuals and small business from enrolling in low premium 
     health plans and making them ineligible for HSAs.

     SEC. 3. ACCELERATED FUNDING FOR HSAS THROUGH DISTRIBUTIONS 
                   FROM BALANCES IN HEALTH REIMBURSEMENT AND 
                   FLEXIBLE SPENDING ARRANGEMENTS AND FROM 
                   INDIVIDUAL RETIREMENT PLANS.

       (a) One-Time FSA and HRA Rollovers to HSAs.--
       (1) In general.--A plan shall not fail to be treated as a 
     flexible spending arrangement or health reimbursement 
     arrangement under section 105 or 106 of the Internal Revenue 
     Code of 1986 merely because--
       (A) such plan provides for a contribution to the health 
     savings account (as defined in section 223 of such Code) of 
     the employee which meets the requirements of paragraph (2), 
     and
       (B) such plan thereafter terminates with respect to such 
     employee.
       (2) Requirements.--A contribution meets the requirements of 
     this paragraph if--
       (A) in the case of a flexible spending arrangement (as 
     defined in section 106(c)(2) of such Code) in existence on 
     June 1, 2006, such contribution is the remaining balance in 
     such arrangement as of the last day of the plan year ending 
     in or before the taxable year in which such contribution is 
     made,
       (B) in the case of a health reimbursement arrangement in 
     existence on June 1, 2006, such contribution is the remaining 
     balance of the amount to be received in reimbursements under 
     such arrangement as of the last day of the plan year ending 
     in or before the taxable year in which such contribution is 
     made, and
       (C) such contribution is made by the employer directly to 
     the health savings account of the employee not later than 60 
     days after the end of the plan year of such flexible spending 
     arrangement or health reimbursement arrangement.
       (3) Treatment as rollover contribution.--For purposes of 
     sections 223 and 4973 of such Code, a contribution which 
     meets the requirements of paragraph (2) shall be treated as a 
     rollover contribution described in section 223(f)(5) of such 
     Code.
       (4) Tax treatment relating to contributions.--For purposes 
     of this title--
       (A) Income tax.--Gross income shall not include the amount 
     of any contribution under this subsection.
       (B) Employment taxes.--Amounts contributed to a health 
     savings account under this subsection shall be treated as a 
     payment described in section 106(d) of such Code.
       (C) Comparability excise tax.--Section 4980G of such Code 
     shall not apply to contributions made under this subsection.
       (5) Termination.--This paragraph shall not apply to any 
     taxable year beginning after December 31, 2011.
       (b) One-Time Distribution From Individual Retirement Plans 
     to Fund HSAs.--
       (1) In general.--Section 402 (relating to taxability of 
     beneficiary of employees' trust) is amended by adding at the 
     end the following new subsection:
       ``(l) Health Savings Account Funding Distribution From 
     Individual Retirement Plans.--
       ``(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 to the extent such distribution is otherwise 
     includible in gross income (determined after the application 
     of paragraph (4)).
       ``(2) Qualified hsa funding distribution.--For purposes of 
     this subsection, the term `qualified HSA funding 
     distribution' means a distribution from an individual 
     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) Limitations.--
       ``(A) Maximum dollar limitations based on out-of pocket 
     limits 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 amount in effect for the taxable year under 
     subclause (I) of section 223(c)(2)(A)(ii), 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 amount in effect for the taxable year under subclause 
     (II) of section 223(c)(2)(A)(ii).
       ``(B) One-time transfer.--
       ``(i) In general.--Except as provided in clause (ii), an 
     individual may make an election under paragraph (1) only for 
     one qualified HSA funding distribution during the lifetime of 
     the individual. Such an election, once made, shall be 
     irrevocable.
       ``(ii) Conversion from self-only to family coverage.--If a 
     qualified HSA funding distribution is made during a month 
     during which an individual has self-only coverage under a 
     high deductible health plan as of the first day of the month, 
     the individual may elect to make an additional qualified HSA 
     funding distribution during a subsequent month during which 
     the individual has family coverage under a high deductible 
     health plan as of the first day of the subsequent month, 
     except that the limitation otherwise applicable under 
     subparagraph (A)(ii) to the distribution during such 
     subsequent month shall be reduced by the amount of the 
     earlier qualified HSA funding distribution.
       ``(4) Application of section 72.--Notwithstanding section 
     72, in determining the extent to which an amount is treated 
     as includible in gross income for purposes of paragraph (1), 
     the aggregate amount distributed from an eligible retirement 
     plan in a taxable year shall be treated as includible in 
     gross income 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' means an individual retirement plan (as 
     defined in section 7701(a)(37)), including an individual 
     retirement plan which is designated as a Roth IRA.
       ``(B) Eligible individual.--The term `eligible individual' 
     has the meaning given such term by section 223(c)(1).
       ``(6) Related plans treated as 1.--For purposes of this 
     subsection, all eligible retirement plans of an employer 
     shall be treated as a single plan.''.
       (2) Coordination with limitation on contributions to 
     hsas.--Section 223(b)(4) (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)).''.
       (3) 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)).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.

     SEC. 4. PROVISIONS RELATING TO ELIGIBILITY TO CONTRIBUTE TO 
                   HSAS.

       (a) Individuals Eligible for Reimbursement Under Spouse's 
     Flexible Spending Arrangement.--Section 223(c)(1) (defining 
     eligible individual) is amended by adding at the end the 
     following new subparagraph:
       ``(C) Special rule for certain flexible spending 
     arrangements.--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 is covered under a flexible

[[Page S6583]]

     spending arrangement (within the meaning of section 
     106(c)(2)) which is maintained by an employer of the spouse 
     of the individual, but only if--
       ``(i) the employer is not also the employer of the 
     individual, and
       ``(ii) the individual certifies to the employer and to the 
     Secretary (in such form and manner as the Secretary may 
     prescribe) that the individual and the individual's spouse 
     will not accept reimbursement under the arrangement for any 
     expenses for medical care provided to the individual.''.
       (b) Individuals Over Age 65 Automatically 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 automatic enrollment 
     for such hospital insurance benefits under the regulations 
     under section 226(a)(1) of such Act.''
       (c) Individuals Eligible for Certain Veterans Benefits.--
     Section 223(c)(1) (defining eligible individual), as amended 
     by subsection (a), 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.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.

     SEC. 5. PROVISIONS RELATING TO CONTRIBUTION AND LOW PREMIUM 
                   HEALTH PLAN LIMITS.

       (a) Increase in Contribution Limits for HSAs.--
       (1) Increase in monthly limit.--
       (A) In general.--Paragraph (2) of section 223(b) (relating 
     to monthly limitation) is amended to read as follows:
       ``(2) Monthly limitation.--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--
       ``(A) in the case of an eligible individual who has self-
     only coverage under a high deductible health plan as of the 
     first day of such month, $2,700, and
       ``(B) in the case of an eligible individual who has family 
     coverage under a high deductible health plan as of the first 
     day of such month, $5,450.''.
       (B) Conforming amendments.--
       (i) Section 223(d)(1)(A)(ii)(I) is amended by striking 
     ``subsection (b)(2)(B)(ii)'' and inserting ``subsection 
     (b)(2)(B)''.
       (ii) Section 223(c)(2)(D) is amended to read as follows:
       ``(D) Special rule for network plans.--In the case of a 
     plan using a network of providers, such plan shall not fail 
     to be treated as a high deductible health plan by reason of 
     having an out-of-pocket limitation for services provided 
     outside of such network which exceeds the applicable 
     limitation under subparagraph (A)(ii).''.
       (2) Increase in limit for individuals becoming eligible 
     individuals after the beginning of the year.--Section 223(b) 
     (relating to limitations) is amended by adding at the end the 
     following new paragraph:
       ``(8) Increase in limit for individuals becoming eligible 
     individuals after the beginning of the year.--An individual 
     who first becomes an eligible individual during a calendar 
     year in a month after January of the calendar year shall, for 
     purposes of computing the limitation under paragraph (1) for 
     any taxable year, be treated as having been an eligible 
     individual during each of the months in such calendar year 
     preceding such first month (and as having been enrolled in 
     each of those months in the same high deductible health plan 
     the individual was enrolled in for such first month).''.
       (3) Application of special rules for married individuals.--
     Paragraph (5) of section 223(b) (relating to special rule for 
     married individuals) 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 excess (if any) 
     of--
       ``(i) the dollar amount in effect under paragraph (2)(B) 
     (without regard to any additional contribution amounts under 
     paragraph (3)), over
       ``(ii) the aggregate amount paid to Archer MSAs of such 
     spouses for the taxable year.
       ``(B) Applicable share.--For purposes of subparagraph (A), 
     a spouse's applicable share is one-half of the limitation 
     under subparagraph (A) unless both spouses agree on a 
     different division.''
       (4) Self-only coverage.--Section 223(c)(4) (defining family 
     coverage) 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.''.
       (b) Family Plan May Have Individual Annual Deductible 
     Limit.--Section 223(c)(2) (defining high deductible health 
     plan) is amended by adding at the end the following new 
     subparagraph:
       ``(E) Special rule for family coverage.--A health plan 
     providing family coverage shall not fail to meet the 
     requirements of subparagraph (A)(i)(II) merely because the 
     plan elects to provide both--
       ``(i) an aggregate annual deductible limit for all 
     individuals covered by the plan which is not less than the 
     amount in effect under subparagraph (A)(i)(II), and
       ``(ii) an annual deductible limit for each individual 
     covered by the plan which is not less than the amount in 
     effect under subparagraph (A)(i)(I).''.
       (c) Cost-of-Living Adjustments Computed Earlier in the 
     Calendar Year.--Paragraph (1) of section 223(g) (relating to 
     cost-of-living adjustment) is amended by adding at the end 
     the following new flush sentence:
     ``In the case of any taxable year beginning after 2006, 
     section 1(f)(4) shall be applied for purposes of this 
     paragraph by substituting `March 31' for `August 31' and the 
     Secretary shall publish the adjusted amounts under 
     subsections (b)(2) and (c)(2)(A) for taxable years beginning 
     in any calendar year no later than June 1 of the preceding 
     calendar year.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.

     SEC. 6. DEFINITION OF QUALIFIED MEDICAL EXPENSES.

       (a) Premiums for Low Premium Health Plans Treated as 
     Qualified Medical Expenses.--Subparagraph (C) of section 
     223(d)(2) 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 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.''.
       (b) Special Rule for Certain Medical Expenses Incurred 
     Before Establishment of Account.--Paragraph (2) of section 
     223(d) 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 a period 
     that such individual was 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) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2006.
                                  ____

  There being no objection, the material was ordered to be printed in 
the Record, as follows:

   The Health Savings Accounts Improvement and Expansion Act of 2006


                           Section-by-Section

     I. Distributions to HSAs from existing health and retirement 
         accounts
       HRA/FSA Rollover--Section 3(a): Health Reimbursement 
     Arrangements (HRAs) are employer-sponsored plans which allow 
     employers to reimburse substantiated employee medical 
     expenses up to a maximum amount. Flexible Spending 
     Arrangements (FSAs) are employer-sponsored plans that are 
     usually funded through voluntary salary reduction agreements 
     with an employee. Participation in these plans disqualifies 
     individuals from contributing to Health Savings Accounts 
     (HSAs) except in limited situations. The disqualification 
     from HSA contributions applies regardless of whether the 
     coverage is provided by the employer of the individual or 
     spouse of the individual.
       Employers with existing FSAs or HSAs might be more likely 
     to offer health savings accounts if they were allowed a one-
     time opportunity to transfer individual balances into HSAs. 
     FSA balances are subject to forfeiture when an individual 
     leaves employment and HRA balances generally revert to the 
     employer. Allowing a one-time conversion opportunity would be 
     very valuable for employees because the balances currently in 
     their employer-sponsored accounts would become employee-owned 
     funds to which they could also contribute in the future and 
     could keep as they change employment.

[[Page S6584]]

       Seeding an HSA Through an IRA Rollover--Section 3(b): HSAs 
     work in combination with High Deductible Health Plans 
     (HDHPs). Because the maximum deductible with an HDHP can be 
     as high as $5,250 for a family plan, with maximum out-of-
     pocket expenses as high as $10,500, these plans can be 
     intimidating for young families or the chronically ill who 
     anticipate substantial medical expenses. To alleviate these 
     concerns and to allow an individual to ``seed'' an HSA with a 
     substantial amount of money, the Act would authorize a one-
     time distribution from an IRA to an HSA, up to the amount of 
     the statutory out-of-pocket maximum. To accommodate a person 
     who elects this distribution while covered by an individual 
     plan, but who later has family coverage, the measure would 
     allow a one-time catch-up contribution of the difference 
     between the original contribution and the statutory limit on 
     out-of-pocket expenses for a family plan. These distributions 
     would not be subject to the ordinary 10% penalty for early 
     IRA distributions.
     II. Eligibility to contribute to HSAs
       Employee Who Has a Spouse with an FSA--Section 4(a): Under 
     current law, an individual may not contribute to an HSA if 
     his spouse has an FSA, even if the individual never seeks to 
     be reimbursed for any medical expenses from the spouse's FSA. 
     The proposal would allow contributions to an HSA provided 
     that the individual certifies that he will not receive 
     reimbursement for any health expenses from his spouse's FSA.
       Older Employees--Section 4(b): Active employees over age 65 
     are permitted to contribute to an HSA so long as the 
     individual is not enrolled in Medicare. However, individuals 
     are automatically enrolled in Medicare Part A (which covers 
     hospital expenses) upon reaching age 65 even though their 
     plan through their employer will typically continue to cover 
     their medical expenses until they retire. The Act would allow 
     older workers who participate in HSAs to be allowed to 
     continue to contribute to their accounts until they retire 
     despite the fact they were automatically enrolled in Medicare 
     Part A at age 65.
       Veterans--Section 4(c): Under current law, a combat wounded 
     veteran who is eligible for medical benefits through the 
     Department of Veterans Affairs (VA) is also HSA eligible. 
     According to Treasury Department guidance, however, the 
     veteran may not contribute to an HSA, if he or she has 
     actually received medical benefits from the VA at any time 
     during the previous three months. The Act would also allow a 
     veteran who actually receives VA medical benefits for a 
     service-connected disability to be eligible for an HSA.
     III. Increasing value in HSAs
       Increasing Contribution Limits--Section 5(a): Under current 
     law HSA contributions are limited to the lesser of the actual 
     deductible or the statutory contribution limit ($2,700 
     individual/$5,450 family for 2006). The President has 
     proposed raising the contribution limit to the statutory out-
     of-pocket maximum for HSAs ($5,250 individual/$10,500 
     family). The proposal would permit mid-year enrollment and 
     allow individuals and families to contribute up to the 
     contribution limit, regardless of the actual deductible of 
     the plan.
       Permitting Individual Family Members to Satisfy Individual 
     Rather than Family Deductible--Section 5(b): Most employer-
     sponsored health plans begin providing coverage as soon as a 
     family member meets the individual deductible for the plan 
     rather than the full family deductible. Current HSA guidance 
     only allows this practice if the individual deductible is at 
     least the minimum deductible for family coverage ($2,000). 
     Allowing coverage to begin after a family member satisfies 
     the individual deductible amount would help to encourage more 
     employees to elect HSAs for themselves and their families.
       Earlier Indexing of Cost of Living Adjustments--Section 
     5(c): The HSA statute directs Treasury to index deductible 
     amounts, out-of-pocket expense limits, and limits on 
     contributions to HSAs. Treasury is required to use third 
     quarter economic data when making these annual updates, which 
     means the new figures are typically issued in December, too 
     late for many employers who need to make these updates much 
     sooner in the year. Directing Treasury to complete the 
     indexing of these amounts by June 1, using first quarter 
     economic data, will give employers the information they need 
     in enough time to modify their plan offerings that take 
     effect the following January.
     IV. Expanding the definition of qualified medical expenses
       Premiums--Section 6(a): A large part of a family's annual 
     medical expenses is the cost of premiums for health 
     insurance. Under current law, high deductible health plan 
     premiums cannot be paid from an HSA. As a result, individuals 
     must pay their premiums with after-tax dollars. Employees 
     must use after-tax dollars to pay their share of premiums for 
     employer-sponsored coverage, unless their employer provides a 
     premium conversion plan under Section 125 of the Internal 
     Revenue Code. The proposal would allow high deductible health 
     plan premiums to be paid with pre-tax dollars from an HSA. 
     This provision will primarily help self-employed individuals 
     and others who purchase plans in the non-group market. 
     Further, it would provide an incentive for employers not 
     currently offering health insurance to make available a low-
     cost high-deductible plan.
       Medical Expenses Incurred Before Establishment of Account--
     Section 6(b): Under current law, only qualified expenses that 
     are incurred after an HSA is established can be distributed 
     tax-free from the account. The Act would allow certain 
     medical expenses incurred before establishment of the HSA to 
     qualify as well. Generally, expenses incurred during the 
     taxable year in which the HSA was established or during the 
     preceding taxable year could be paid from the account without 
     penalty.
                                 ______