[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.