[House Report 108-177]
[From the U.S. Government Publishing Office]



108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    108-177
======================================================================
 
                HEALTH SAVINGS ACCOUNT AVAILABILITY ACT

                                _______
                                

 June 25, 2003.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Thomas, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 2351]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 2351) to amend the Internal Revenue Code of 1986 to 
allow a deduction to individuals for amounts contributed to 
health savings accounts and to provide for the disposition of 
unused health benefits in cafeteria plans and flexible spending 
arrangements, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.

                                CONTENTS

                                                                   Page
  I. Summary and Background...........................................9
          A. Purpose and Summary.................................     9
          B. Background and Need for Legislation.................     9
          C. Legislative History.................................    10
 II. Explanation of Bill.............................................10
          A. Health Savings Accounts (sec. 2 of the bill and new 
              sec. 223 of the Code)..............................    10
          B. Disposition of Unused Health Benefits in Flexible 
              Spending Arrangements (sec. 3 of the bill and sec. 
              125 of the Code)...................................    18
          C. Exception to Information Reporting Requirements for 
              Certain Health Arrangements (sec. 4 of the bill and 
              sec. 6041 of the Code).............................    19
III. Votes of the Committee..........................................20
 IV. Budget Effects of the Bill......................................21
          A. Committee Estimate of Budgetary Effects.............    21
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................    23
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................    23
          D. Macroeconomic Impact Analysis.......................    25
  V. Other Matters To Be Discussed Under the Rules of the House......25
          A. Committee Oversight Findings and Recommendations....    25
          B. Statement of General Performance Goals and 
              Objectives.........................................    26
          C. Constitutional Authority Statement..................    26
          D. Information Relating to Unfunded Mandates...........    26
          E. Applicability of House Rule XXI 5(b)................    26
          F. Tax Complexity Analysis.............................    26
 VI. Changes in Existing Law Made by the Bill, as Reported...........31
VII. Dissenting Views................................................50

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Health Savings Account Availability 
Act''.

SEC. 2. HEALTH SAVINGS ACCOUNTS.

  (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 223 as 
section 224 and by inserting after section 222 the following new 
section:

``SEC. 223. HEALTH SAVINGS ACCOUNTS.

  ``(a) Deduction Allowed.--In the case of an individual who is an 
eligible individual for any month during the taxable year, there shall 
be allowed as a deduction for the taxable year an amount equal to the 
aggregate amount paid in cash during such taxable year by such 
individual to a health savings account of such individual.
  ``(b) Limitations.--
          ``(1) In general.--The amount allowable as a deduction under 
        subsection (a) to an individual for the taxable year shall not 
        exceed the sum of the monthly limitations for months during 
        such taxable year that the individual is an eligible 
        individual.
          ``(2) Monthly limitation.--The monthly limitation for any 
        month is \1/12\ of--
                  ``(A) $2,000, in the case of an eligible individual 
                who--
                          ``(i) has self-only coverage under a minimum 
                        deductible plan as of the first day of such 
                        month, or
                          ``(ii) is uninsured as of the first day of 
                        such month and is not described in subparagraph 
                        (B)(ii) with respect to the taxable year which 
                        includes such month,
                  ``(B) $4,000, in the case of an eligible individual 
                who--
                          ``(i) has family coverage under a minimum 
                        deductible plan as of the first day of such 
                        month, or
                          ``(ii) is uninsured as of the first day of 
                        such month and, with respect to the taxable 
                        year which includes such month--
                                  ``(I) is entitled to a deduction for 
                                a dependent under section 151(c) (or 
                                would be so entitled but for paragraph 
                                (2) or (4) of section 152(e)), or
                                  ``(II) files a joint return, and
                  ``(C) zero in any other case.
          ``(3) Additional contributions for individuals 55 or older.--
                  ``(A) In general.--In the case of an individual who 
                has attained the age of 55 before the close of the 
                taxable year, paragraph (2) shall be applied by 
                increasing the $2,000 amount in paragraph (2)(A) and 
                the $4,000 amount in paragraph (2)(B) by the additional 
                contribution amount.
                  ``(B) Additional contribution amount.--For purposes 
                of this section, the additional contribution amount is 
                the amount determined in accordance with the following 
                table:

``For taxable years                                      The additional
beginning in:                                   contribution amount is:
    2004..........................................                $500 
    2005..........................................                $600 
    2006..........................................                $700 
    2007..........................................                $800 
    2008..........................................                $900 
    2009 and thereafter...........................              $1,000.

          ``(4) Limitation based on adjusted gross income.--
                  ``(A) In general.--The dollar amount in paragraph 
                (2)(A) and the dollar amount in paragraph (2)(B) (in 
                each case as increased under paragraph (3)) shall each 
                be reduced (but not below zero) by an amount which 
                bears the same ratio to such dollar amount as--
                          ``(i) the excess of--
                                  ``(I) the taxpayer's adjusted gross 
                                income for such taxable year, over
                                  ``(II) the applicable dollar amount, 
                                bears to
                          ``(ii) $10,000 ($20,000 in the case of a 
                        joint return for a taxable year beginning after 
                        December 31, 2006).
                  ``(B) No reduction below $200 until complete phase-
                out.--No dollar amount shall be reduced below $200 
                under subparagraph (A) unless (without regard to this 
                subparagraph) such limitation is reduced to zero.
                  ``(C) Rounding.--Any amount determined under this 
                paragraph which is not a multiple of $10 shall be 
                rounded to the next lowest $10.
                  ``(D) Adjusted gross income.--For purposes of this 
                paragraph, adjusted gross income shall be determined--
                          ``(i) without regard to this section or 
                        section 911, and
                          ``(ii) after application of sections 86, 135, 
                        137, 219, 221, 222, and 469.
                  ``(E) Applicable dollar amount.--For purposes of this 
                paragraph, the term `applicable dollar amount' has the 
                meaning given such term in section 219(g)(3)(B). The 
                rule of section 219(g)(4) (relating to special rule for 
                married individuals filing separately and living apart) 
                shall apply for purposes of the preceding sentence.
          ``(5) Coordination with other contributions.--The limitation 
        which would (but for this paragraph) apply under this 
        subsection to the taxpayer for any taxable year shall be 
        reduced (but not below zero) by the sum of--
                  ``(A) the aggregate amount which would (but for 
                section 125(h)(1)(B) and subsections (b) and (d) of 
                section 106) be includible in the taxpayer's gross 
                income for such taxable year, and
                  ``(B) the aggregate amount paid during such taxable 
                year by such individual to Archer MSAs of such 
                individual.
          ``(6) Special rules for married individuals, dependents, and 
        medicare eligible individuals.--Rules similar to the rules of 
        paragraphs (3), (6), and (7) of section 220(b) shall apply for 
        purposes of this section.
  ``(c) Definitions.--For purposes of this section--
          ``(1) Eligible individual.--
                  ``(A) In general.--The term `eligible individual' 
                means, with respect to any month, any individual unless 
                such individual is covered, as of the first day of such 
                month, under any health plan which is not a minimum 
                deductible plan.
                  ``(B) Certain coverage disregarded.--Subparagraph (A) 
                shall be applied without regard to--
                          ``(i) coverage for any benefit provided by 
                        permitted insurance, and
                          ``(ii) coverage (whether through insurance or 
                        otherwise) for accidents, disability, dental 
                        care, vision care, or long-term care.
          ``(2) Minimum deductible plan.--
                  ``(A) In general.--The term `minimum deductible plan' 
                means a health plan--
                          ``(i) in the case of self-only coverage, 
                        which has an annual deductible which is not 
                        less than $500, and
                          ``(ii) in the case of family coverage, which 
                        has an annual deductible which is not less than 
                        twice the dollar amount in clause (i) (as 
                        increased under subparagraph (B)).
                  ``(B) Cost-of-living adjustment for annual 
                deductibles.--
                          ``(i) In general.--In the case of any taxable 
                        year beginning in a calendar year after 2004, 
                        the $500 amount in subparagraph (A)(i) 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 such taxable 
                                year begins by substituting `calendar 
                                year 2003' for `calendar year 1992' in 
                                subparagraph (B) thereof.
                          ``(ii) Rounding.--If any increase under 
                        clause (i) is not a multiple of $50, such 
                        increase shall be rounded to the nearest 
                        multiple of $50.
                  ``(C) Special rules.--
                          ``(i) Exclusion of certain plans.--Such term 
                        does not include a health plan if substantially 
                        all of its coverage is coverage described in 
                        paragraph (1)(B).
                          ``(ii) Safe harbor for absence of preventive 
                        care deductible.--A plan shall not fail to be 
                        treated as a minimum deductible plan by reason 
                        of failing to have a deductible for preventive 
                        care.
          ``(3) Permitted insurance.--The term `permitted insurance' 
        has the meaning given such term in section 220(c)(3).
          ``(4) Family coverage.--The term `family coverage' has the 
        meaning given such term in section 220(c)(5).
          ``(5) Archer msa.--The term `Archer MSA' has the meaning 
        given such term in section 220(d).
  ``(d) Health Savings Account.--For purposes of this section--
          ``(1) In general.--The term `health savings account' means a 
        trust created or organized in the United States as a health 
        savings account exclusively for the purpose of paying the 
        qualified medical expenses of the account beneficiary, but only 
        if the written governing instrument creating the trust meets 
        the following requirements:
                  ``(A) Except in the case of a rollover contribution 
                from an Archer MSA, or a health savings account, which 
                is not includible in gross income, no contribution will 
                be accepted--
                          ``(i) unless it is in cash and is contributed 
                        by--
                                  ``(I) the account beneficiary,
                                  ``(II) a member of the family of the 
                                account beneficiary, or
                                  ``(III) an employer of the account 
                                beneficiary, and
                          ``(ii) to the extent such contribution, when 
                        added to previous contributions to the trust 
                        for the calendar year, exceeds the dollar 
                        amount in subsection (b)(2)(B) increased by the 
                        additional contribution amount for taxable 
                        years beginning in such calendar year.
                  ``(B) The trustee is a bank (as defined in section 
                408(n)), an insurance company (as defined in section 
                816), or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such 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 will not be commingled 
                with other property except in a common trust fund or 
                common investment fund.
                  ``(E) The interest of an individual in the balance in 
                his account is nonforfeitable.
          ``(2) Member of the family.--The term `member of the family' 
        has the meaning given such term in section 2032A(e)(2).
          ``(3) Qualified medical expenses.--The term `qualified 
        medical expenses' has the meaning given such term in section 
        220(d)(2), except that--
                  ``(A) subparagraph (B)(i) thereof shall not apply 
                to--
                          ``(i) insurance which constitutes a minimum 
                        deductible plan if no portion of the cost of 
                        such insurance is paid by an employer or former 
                        employer of the account beneficiary or the 
                        spouse of such beneficiary, and
                          ``(ii) any health insurance (other than 
                        health insurance substantially all of its 
                        coverage is coverage described in subsection 
                        (c)(1)(B)) if the account beneficiary has 
                        attained age 65, and
                  ``(B) subparagraph (C) thereof shall not apply for 
                purposes of this section.
          ``(4) Account beneficiary.--The term `account beneficiary' 
        means the individual on whose behalf the health savings account 
        was established.
          ``(5) Certain rules to apply.--Rules similar to the following 
        rules shall apply for purposes of this section:
                  ``(A) Section 219(d)(2) (relating to no deduction for 
                rollovers).
                  ``(B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                  ``(C) Except as provided in section 106(d), section 
                219(f)(5) (relating to employer payments).
                  ``(D) Section 408(g) (relating to community property 
                laws).
                  ``(E) Section 408(h) (relating to custodial 
                accounts).
          ``(6) Contributions from flexible spending accounts treated 
        as made by the employer.--Any contribution from a flexible 
        spending account to a health savings account which is not 
        includible in the gross income of the employee by reason of 
        section 125(h) shall be treated as a contribution made by the 
        employer for purposes of this section.
  ``(e) Tax Treatment of Accounts.--
          ``(1) In general.--A health savings account is exempt from 
        taxation under this subtitle unless such account has ceased to 
        be a health savings account. Notwithstanding the preceding 
        sentence, any such account is subject to the taxes imposed by 
        section 511 (relating to imposition of tax on unrelated 
        business income of charitable, etc. organizations).
          ``(2) Account terminations.--Rules similar to the rules of 
        paragraphs (2) and (4) of section 408(e) shall apply to health 
        savings accounts, and any amount treated as distributed under 
        such similar rules shall be treated as not used to pay 
        qualified medical expenses.
  ``(f) Tax Treatment of Distributions.--
          ``(1) Amounts used for qualified medical expenses.--Any 
        amount paid or distributed out of a health savings account 
        which is used exclusively to pay qualified medical expenses of 
        any account beneficiary shall not be includible in gross 
        income.
          ``(2) Inclusion of amounts not used for qualified medical 
        expenses.--
                  ``(A) In general.--Any amount paid or distributed out 
                of a health savings account which is not used 
                exclusively to pay the qualified medical expenses of 
                the account beneficiary shall be included in the gross 
                income of such beneficiary in the manner provided under 
                section 72.
                  ``(B) Special rules for applying section 72.--For 
                purposes of applying section 72 to any amount described 
                in subparagraph (A)--
                          ``(i) all health savings accounts shall be 
                        treated as 1 contract,
                          ``(ii) all distributions during any taxable 
                        year shall be treated as 1 distribution,
                          ``(iii) the value of the contract, income on 
                        the contract, and investment in the contract 
                        shall be computed as of the close of the 
                        calendar year in which the taxable year begins, 
                        and
                          ``(iv) such distributions shall be treated as 
                        made from contributions from members of the 
                        family of the account beneficiary to the extent 
                        that such distribution, when added to all 
                        previous distributions from the health savings 
                        account taken into account under this clause, 
                        do not exceed the aggregate contributions from 
                        members of such family.
          ``(3) Excess contributions returned before due date of 
        return.--
                  ``(A) In general.--If any excess contribution is 
                contributed for a taxable year to any health savings 
                account of an individual, paragraph (2) shall not apply 
                to distributions from the health savings accounts of 
                such individual (to the extent such distributions do 
                not exceed the aggregate excess contributions to all 
                such accounts of such individual for such year) if--
                          ``(i) such distribution is made on or before 
                        the last day prescribed by law (including 
                        extensions of time) for filing the account 
                        beneficiary's return for such taxable year,
                          ``(ii) no deduction is allowed under this 
                        section with respect to such contribution,
                          ``(iii) such distribution is accompanied by 
                        the amount of net income attributable to such 
                        excess contribution, and
                          ``(iv) such distribution satisfies the 
                        requirements of subparagraph (B).
                  ``(B) Rules related to ordering.--
                          ``(i) Distributions limited to 
                        contributions.--Subparagraph (A) shall apply to 
                        distributions to a person only to the extent of 
                        the contributions of such person to such 
                        accounts during such taxable year.
                          ``(ii) Classes of contributors.--Subparagraph 
                        (A) shall apply only to distributions of such 
                        contributions which are made in the following 
                        order:
                                  ``(I) first, to members of the family 
                                of the account beneficiary,
                                  ``(II) second, to the account 
                                beneficiary,
                                  ``(III) third, to employers of the 
                                account beneficiary with respect to 
                                contributions under section 125(h), and
                                  ``(IV) fourth, to employers of the 
                                account beneficiary with respect to 
                                contributions under section 106(d).
                          ``(iii) Last-in first-out.--If distributions 
                        could be made to more than one person under any 
                        subclause of clause (ii), subparagraph (A) 
                        shall not apply to any such distribution unless 
                        such distribution is of the most recent excess 
                        contribution which has not been distributed to 
                        the contributor.
                  ``(C) Treatment of net income.--Any net income 
                described in subparagraph (A)(iii) shall be included in 
                the gross income of the person receiving the 
                distribution for the taxable year in which received.
                  ``(D) Excess contribution.--For purposes of 
                subparagraph (A), the term `excess contribution' means 
                any contribution (other than a rollover contribution 
                from another health savings account, or from an Archer 
                MSA, which is not includible in gross income) to the 
                extent such contribution results in the aggregate 
                contributions to health savings accounts of the account 
                beneficiary for the taxable year to be in excess of the 
                limitation under subsection (b) (determined without 
                regard to paragraph (5) thereof) which applies to such 
                beneficiary for such year.
          ``(4) Additional tax on distributions not used for qualified 
        medical expenses.--
                  ``(A) In general.--The tax imposed by this chapter on 
                the account beneficiary for any taxable year in which 
                there is a payment or distribution from a health 
                savings account of such beneficiary which is includible 
                in gross income under paragraph (2) shall be increased 
                by 15 percent of the amount which is so includible.
                  ``(B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment or 
                distribution is made after the account beneficiary 
                becomes disabled within the meaning of section 72(m)(7) 
                or dies.
                  ``(C) Exception for distributions after medicare 
                eligibility.--Subparagraph (A) shall not apply to any 
                payment or distribution after the date on which the 
                account beneficiary attains the age specified in 
                section 1811 of the Social Security Act.
          ``(5) Special rules.--Rules similar to the rules of 
        paragraphs (5), (6), (7), and (8) of section 220(f) shall apply 
        for purposes of this section.
  ``(g) Reports.--The Secretary may require the trustee of a health 
savings account to make such reports regarding such account to the 
Secretary and to the account beneficiary with respect to contributions, 
distributions, and such other matters as the Secretary determines 
appropriate. 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 by the Secretary.
  ``(h) Regulations.--The Secretary may issue regulations to carry out 
the purposes of this section, including regulations regarding the 
proper treatment of distributions described in subsection (f)(3) and 
nondeductible contributions by members of the family of the account 
beneficiary.''.
  (b) Deduction Allowed Whether or Not Individual Itemizes Other 
Deductions.--Subsection (a) of section 62 of such Code is amended by 
inserting after paragraph (18) the following new paragraph:
          ``(19) Health savings accounts.--The deduction allowed by 
        section 223.''.
  (c) Rollovers from Archer MSAs Permitted.--Subparagraph (A) of 
section 220(f)(5) of such Code (relating to rollover contribution) is 
amended by inserting ``or a health savings account (as defined in 
section 223(d))'' after ``paid into an Archer MSA''.
  (d) Exclusions for Employer Contributions to Health Savings 
Accounts.--
          (1) Exclusion from income tax.--Section 106 of such Code 
        (relating to contributions by employer to accident and health 
        plans) is amended by adding at the end the following new 
        subsection:
  ``(d) Contributions to Health Savings Accounts.--
          ``(1) In general.--In the case of an employee who is an 
        eligible individual, amounts contributed by such employee's 
        employer to any health savings account of such employee shall 
        be treated as employer-provided coverage for medical expenses 
        under an accident or health plan to the extent such amounts do 
        not exceed the excess of--
                  ``(A) the limitation under section 223(b) (determined 
                without regard to this subsection) which is applicable 
                to such employee for such taxable year, over
                  ``(B) the aggregate amount treated as employer-
                provided coverage for medical expenses under an 
                accident or health plan under subsection (b).
          ``(2) Special rules.--Rules similar to the rules of 
        paragraphs (2), (3), (4), and (5) of subsection (b) shall apply 
        for purposes of this subsection.
          ``(3) Definitions.--For purposes of this subsection, the 
        terms `eligible individual' and `health savings account' have 
        the respective meanings given to such terms by section 223.
          ``(4) Cross reference.--

                  ``For penalty on failure by employer to make 
comparable contributions to the health savings accounts of comparable 
employees, see section 4980G.''.

          (2) Exclusion from employment taxes.--
                  (A) Railroad retirement tax.--Subsection (e) of 
                section 3231 of such Code is amended by adding at the 
                end the following new paragraph:
          ``(11) Health savings account contributions.--The term 
        `compensation' shall not include any payment made to or for the 
        benefit of an employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to exclude 
        such payment from income under section 106(d).''.
                  (B) Unemployment tax.--Subsection (b) of section 3306 
                of such Code is amended by striking ``or'' at the end 
                of paragraph (16), by striking the period at the end of 
                paragraph (17) and inserting ``; or'', and by inserting 
                after paragraph (17) the following new paragraph:
          ``(18) any payment made to or for the benefit of an employee 
        if at the time of such payment it is reasonable to believe that 
        the employee will be able to exclude such payment from income 
        under section 106(d).''.
                  (C) Withholding tax.--Subsection (a) of section 3401 
                of such Code is amended by striking ``or'' at the end 
                of paragraph (20), by striking the period at the end of 
                paragraph (21) and inserting ``; or'', and by inserting 
                after paragraph (21) the following new paragraph:
          ``(22) any payment made to or for the benefit of an employee 
        if at the time of such payment it is reasonable to believe that 
        the employee will be able to exclude such payment from income 
        under section 106(d).''.
          (3) Employer contributions required to be shown on w-2.--
        Subsection (a) of section 6051 of such Code is amended by 
        striking ``and'' at the end of paragraph (10), by striking the 
        period at the end of paragraph (11) and inserting ``, and'', 
        and by inserting after paragraph (11) the following new 
        paragraph:
          ``(12) the amount contributed to any health savings account 
        (as defined in section 223(d)) of such employee or such 
        employee's spouse.''.
          (4) Penalty for failure of employer to make comparable health 
        savings account contributions.--
                  (A) In general.--Chapter 43 of such Code is amended 
                by adding after section 4980F the following new 
                section:

``SEC. 4980G. FAILURE OF EMPLOYER TO MAKE COMPARABLE HEALTH SAVINGS 
                    ACCOUNT CONTRIBUTIONS.

  ``(a) General Rule.--In the case of an employer who makes a 
contribution to the health savings account of any employee with respect 
to coverage under a minimum deductible plan of the employer during a 
calendar year, there is hereby imposed a tax on the failure of such 
employer to meet the requirements of subsection (d) for such calendar 
year.
  ``(b) Amount of Tax.--The amount of the tax imposed by subsection (a) 
on any failure for any calendar year is the amount equal to 35 percent 
of the aggregate amount contributed by the employer to health savings 
accounts of employees for taxable years of such employees ending with 
or within such calendar year.
  ``(c) Waiver by Secretary.--In the case of a failure which is due to 
reasonable cause and not to willful neglect, the Secretary may waive 
part or all of the tax imposed by subsection (a) to the extent that the 
payment of such tax would be excessive relative to the failure 
involved.
  ``(d) Employer Required To Make Comparable Health Savings Account 
Contributions for All Participating Employees.--An employer meets the 
requirements of this subsection for any calendar year if the employer 
meets the requirements of section 4980E(d) applied by--
          ``(1) substituting `health savings account' for `Archer MSA' 
        each place it appears, and
          ``(2) not taking into account any contribution made under 
        section 125.
  ``(e) Controlled Groups.--For purposes of this section, all persons 
treated as a single employer under subsection (b), (c), (m), or (o) of 
section 414 shall be treated as 1 employer.
  ``(f) Definitions.--Terms used in this section which are also used in 
section 223 have the respective meanings given such terms in section 
223.''.
                  (B) Clerical amendment.--The table of sections for 
                chapter 43 of such Code is amended by adding after the 
                item relating to section 4980F the following new item:

``Sec. 4980G. Failure of employer to make comparable health savings 
account contributions.''.

  (e) Tax on Excess Contributions.--Section 4973 of such Code (relating 
to tax on excess contributions to certain tax-favored accounts and 
annuities) is amended--
          (1) by striking ``or'' at the end of paragraph (3) of 
        subsection (a),
          (2) by inserting ``or'' at the end of paragraph (4) of 
        subsection (a),
          (3) by inserting after paragraph (4) of subsection (a) the 
        following new paragraph:
          ``(5) a health savings account (within the meaning of section 
        223(d)),'', and
          (4) by adding at the end the following new subsection:
  ``(g) Excess Contributions to Health Savings Accounts.--For purposes 
of this section, in the case of health savings accounts (within the 
meaning of section 223(d)), the term `excess contributions' means the 
sum of--
          ``(1) the aggregate amount contributed for the taxable year 
        to the accounts (other than a rollover contribution from 
        another health savings account, or from an Archer MSA, which is 
        not includible in gross income) which is in excess of the 
        limitation under section 223(b) (determined without regard to 
        paragraph (5) thereof), and
          ``(2) the amount determined under this subsection for the 
        preceding taxable year, reduced by the sum of--
                  ``(A) the distributions out of the accounts which 
                were included in gross income under section 223(f)(2), 
                and
                  ``(B) the excess (if any) of--
                          ``(i) the sum of limitations described in 
                        paragraph (1), over
                          ``(ii) the amount contributed to the accounts 
                        for the taxable year.
For purposes of this subsection, any contribution which is distributed 
out of the health savings account in a distribution to which section 
223(f)(3) applies shall be treated as an amount not contributed.''.
  (f) Tax on Prohibited Transactions.--
          (1) Section 4975 of such Code (relating to tax on prohibited 
        transactions) is amended by adding at the end of subsection (c) 
        the following new paragraph:
          ``(6) Special rule for health savings accounts.--An 
        individual for whose benefit a health savings account (within 
        the meaning of section 223(d)) is established 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, with respect to such 
        transaction, the account ceases to be a health savings account 
        by reason of the application of section 223(e)(2) to such 
        account.''.
          (2) Paragraph (1) of section 4975(e) of such Code is amended 
        by redesignating subparagraphs (E) and (F) as subparagraphs (F) 
        and (G), respectively, and by inserting after subparagraph (D) 
        the following new subparagraph:
                  ``(E) a health savings account described in section 
                223(d),''.
  (g) Failure To Provide Reports on Health Savings Accounts.--Paragraph 
(2) of section 6693(a) of such Code (relating to reports) is amended by 
redesignating subparagraphs (C) and (D) as subparagraphs (D) and (E), 
respectively, and by inserting after subparagraph (B) the following new 
subparagraph:
                  ``(C) section 223(g) (relating to health savings 
                accounts),''.
  (h) Exception From Capitalization of Policy Acquisition Expenses.--
Subparagraph (B) of section 848(e)(1) of such Code (defining specified 
insurance contract) is amended by striking ``and'' at the end of clause 
(iii), by striking the period at the end of clause (iv) and inserting 
``, and'', and by adding at the end the following new clause:
                          ``(v) any contract which is a health savings 
                        account (as defined in section 223(d)).''.
  (i) Health Savings Accounts May Be Offered Under Cafeteria Plans.--
Paragraph (2) of section 125(d) (relating to cafeteria plan defined) is 
amended by adding at the end the following new subparagraph:
                  ``(D) Exception for health savings accounts.--
                Subparagraph (A) shall not apply to a plan to the 
                extent of amounts which a covered employee may elect to 
                have the employer pay as contributions to a health 
                savings account established on behalf of the 
                employee.''.
  (j) Conforming Amendments.--
          (1) The table of sections for part VII of subchapter B of 
        chapter 1 of such Code is amended by striking the last item and 
        inserting the following:

``Sec. 223. Health savings accounts.
``Sec. 224. Cross reference.''.

          (2)(A) Sections 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), 
        219(g)(3)(A)(ii), and 221(b)(2)(C)(i) are each amended by 
        inserting ``223,'' after ``222,''.
          (B) Section 222(b)(2)(C)(i) is amended by inserting ``223,'' 
        before ``911''.
          (C) Section 469(i)(3)(F)(iii) is amended by striking ``and 
        222'' and inserting ``222, and 223''.
  (k) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 3. DISPOSITION OF UNUSED HEALTH BENEFITS IN CAFETERIA PLANS AND 
                    FLEXIBLE SPENDING ARRANGEMENTS.

  (a) In General.--Section 125 of the Internal Revenue Code of 1986 
(relating to cafeteria plans) is amended by redesignating subsections 
(h) and (i) as subsections (i) and (j), respectively, and by inserting 
after subsection (g) the following:
  ``(h) Contributions of Certain Unused Health Benefits.--
          ``(1) In general.--For purposes of this title, a plan or 
        other arrangement shall not fail to be treated as a cafeteria 
        plan solely because qualified benefits under such plan include 
        a health flexible spending arrangement under which not more 
        than $500 of unused health benefits may be--
                  ``(A) carried forward to the succeeding plan year of 
                such health flexible spending arrangement,
                  ``(B) to the extent permitted by section 223, 
                contributed on behalf of the employee to a health 
                savings account (as defined in section 223(d)) 
                maintained for the benefit of such employee, or
                  ``(C) contributed to a qualified retirement plan (as 
                defined in section 4974(c)), or an eligible deferred 
                compensation plan (as defined in section 457(b)) of an 
                eligible employer described in section 457(e)(1)(A), 
                but only to the extent such amount would not be allowed 
                as a deduction under section 223 if made directly by 
                the employee to a health savings account of the 
                employee (determined without regard to any other 
                contributions made by the employee).
          ``(2) Special rules for treatment of contributions to 
        retirement plans.--For purposes of this title, contributions 
        under paragraph (1)(C)--
                  ``(A) shall be treated as elective deferrals (as 
                defined in section 402(g)(3)) in the case of 
                contributions to a qualified cash or deferred 
                arrangement (as defined in section 401(k)) or to an 
                annuity contract described in section 403(b),
                  ``(B) shall be treated as employer contributions in 
                the case of a plan (other than a plan described in 
                subparagraph (A)) which is described in section 401(a) 
                which includes a trust exempt from tax under section 
                501(a),
                  ``(C) shall be treated as deferred compensation in 
                the case of contributions to an eligible deferred 
                compensation plan (as defined in section 457(b)), and
                  ``(D) shall be treated in the manner designated for 
                purposes of section 408 or 408A in the case of 
                contributions to an individual retirement plan.
          ``(3) Health flexible spending arrangement.--For purposes of 
        this subsection, the term `health flexible spending 
        arrangement' means a flexible spending arrangement (as defined 
        in section 106(c)) that is a qualified benefit and only permits 
        reimbursement for expenses for medical care (as defined in 
        section 213(d)(1) (without regard to subparagraphs (C) and (D) 
        thereof).
          ``(4) Unused health benefits.--For purposes of this 
        subsection, with respect to an employee, the term `unused 
        health benefits' means the excess of--
                  ``(A) the maximum amount of reimbursement allowable 
                to the employee during a plan year under a health 
                flexible spending arrangement, taking into account any 
                election by the employee, over
                  ``(B) the actual amount of reimbursement during such 
                year under such arrangement.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2003.

SEC. 4. EXCEPTION TO INFORMATION REPORTING REQUIREMENTS RELATED TO 
                    CERTAIN HEALTH ARRANGEMENTS.

  (a) In General.--Section 6041 (relating to information at source) is 
amended by adding at the end the following new subsection:
  ``(f) Section Does Not Apply to Certain Health Arrangements.--This 
section shall not apply to any payment for medical care (as defined in 
section 213(d)) made under--
          ``(1) a flexible spending arrangement (as defined in section 
        106(c)(2)), or
          ``(2) a health reimbursement arrangement which is treated as 
        employer-provided coverage under an accident or health plan for 
        purposes of section 106.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2002.
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