House Report 109-704 - HEALTH OPPORTUNITY PATIENT EMPOWERMENT ACT OF 2006

[House Report 109-704]
[From the U.S. Government Publishing Office]

109th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 109-704

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HEALTH OPPORTUNITY PATIENT EMPOWERMENT ACT OF 2006

_______

September 29, 2006.--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. 6134]

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to whom was referred the
bill (H.R. 6134) to amend the Internal Revenue Code of 1986 to
expand health coverage through the use of high deductible
health plans and to encourage the use of health savings
accounts, 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...........................................5
A. Purpose and Summary................................. 5
B. Background and Need for Legislation................. 6
C. Legislative History................................. 6
II. Explanation of the Bill..........................................7
A. Present Law......................................... 7
B. Reasons for Change.................................. 11
C. Explanation of Provision............................ 12
1. Allow rollovers from health FSAs and HRAs into
HSAs for a limited time.......................... 12
2. Certain FSA coverage treated as disregarded
coverage......................................... 13
3. Repeal of annual plan deductible limitation on HSA
contribution limitation.......................... 14
4. Earlier indexing of cost of living adjustments.... 14
5. Allow full contribution for months preceding month
that taxpayer is an eligible individual.......... 14
6. Modify employer comparable contribution
requirements for contributions made to nonhighly
compensated employees............................ 15
7. One-time rollovers from IRAs into HSAs............ 16
III. Votes of the Committee..........................................16
IV. Budget Effects of the Bill......................................17
V. Other Matters To Be Discussed Under the Rules of the House......21
A. Committee Oversight Findings and Recommendations.... 21
B. Statement of General Performance Goals and
Objectives......................................... 21
C. Constitutional Authority Statement.................. 21
D. Information Relating to Unfunded Mandates........... 21
E. Applicability of House Rule XXI 5(b)................ 21
F. Tax Complexity Analysis............................. 22
G. Tax Earmarks........................................ 22
VI. Changes in Existing Law Made by the Bill, as Reported...........22
VII. Dissenting Views................................................29

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 Opportunity Patient Empowerment
Act of 2006''.

SEC. 2. FSA AND HRA TERMINATIONS TO FUND HSAS.

(a) In General.--Section 106 of the Internal Revenue Code of 1986
(relating to contributions by employer to accident and health plans) is
amended by adding at the end the following new subsection:
``(e) FSA and HRA Terminations to Fund HSAs.--
``(1) In general.--A plan shall not fail to be treated as a
health flexible spending arrangement or health reimbursement
arrangement under this section or section 105 merely because
such plan provides for a qualified HSA distribution.
``(2) Qualified hsa distribution.--The term `qualified HSA
distribution' means a distribution from a health flexible
spending arrangement or health reimbursement arrangement to the
extent that such distribution--
``(A) does not exceed the lesser of the balance in
such arrangement on September 21, 2006, or as of the
date of such distribution, and
``(B) is contributed by the employer directly to the
health savings account of the employee before January
1, 2012.
Such term shall not include more than 1 distribution with
respect to any arrangement.
``(3) Additional tax for failure to maintain high deductible
health plan coverage.--
``(A) In general.--If, at any time during the testing
period, the employee is not an eligible individual,
then the amount of the qualified HSA distribution--
``(i) shall be includible in the gross income
of the employee for the taxable year in which
occurs the first month in the testing period
for which such employee is not an eligible
individual, and
``(ii) the tax imposed by this chapter for
such taxable year on the employee shall be
increased by 10 percent of the amount which is
so includible.
``(B) Exception for disability or death.--Clauses (i)
and (ii) of subparagraph (A) shall not apply if the
employee ceases to be an eligible individual by reason
of the death of the employee or the employee becoming
disabled (within the meaning of section 72(m)(7)).
``(4) Definitions and special rules.--For purposes of this
subsection--
``(A) Testing period.--The term `testing period'
means the period beginning with the month in which the
qualified HSA distribution is contributed to the health
savings account and ending on the last day of the 12th
month following such month.
``(B) Eligible individual.--The term `eligible
individual' has the meaning given such term by section
223(c)(1).
``(C) Treatment as rollover contribution.--A
qualified HSA distribution shall be treated as a
rollover contribution described in section 223(f)(5).
``(5) Tax treatment relating to distributions.--For purposes
of this title--
``(A) In general.--A qualified HSA distribution shall
be treated as a payment described in subsection (d).
``(B) Comparability excise tax.--
``(i) In general.--Except as provided in
clause (ii), section 4980G shall not apply to
qualified HSA distributions.
``(ii) Failure to offer to all employees.--In
the case of a qualified HSA distribution to any
employee, the failure to offer such
distribution to any eligible individual covered
under a high deductible health plan of the
employer shall (notwithstanding section
4980G(d)) be treated for purposes of section
4980G as a failure to meet the requirements of
section 4980G(b).''
(b) Certain FSA Coverage Disregarded Coverage.--Subparagraph (B) of
section 223(c)(1) of such Code (relating to certain coverage
disregarded) is amended by striking ``and'' at the end of clause (i),
by striking the period at the end of clause (ii) and inserting ``,
and'', and by inserting after clause (ii) the following new clause:
``(iii) for taxable years beginning after
December 31, 2006, coverage under a health
flexible spending arrangement during any period
immediately following the end of a plan year of
such arrangement during which unused benefits
or contributions remaining at the end of such
plan year may be paid or reimbursed to plan
participants for qualified benefit expenses
incurred during such period if--
``(I) the balance in such arrangement
at the end of such plan year is zero,
or
``(II) the individual is making a
qualified HSA distribution (as defined
in section 106(e)) in an amount equal
to the remaining balance in such
arrangement as of the end of such plan
year, in accordance with rules
prescribed by the Secretary.''.
(c) Application of Section.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to distributions on or after the date of the
enactment of this Act.
(2) Subsection (b).--The amendment made by subsection (b)
shall take effect on the date of the enactment of this Act.

SEC. 3. REPEAL OF ANNUAL DEDUCTIBLE LIMITATION ON HSA CONTRIBUTIONS.

(a) In General.--Paragraph (2) of section 223(b) of the Internal
Revenue Code of 1986 (relating to monthly limitation) is amended--
(1) in subparagraph (A) by striking ``the lesser of--'' and
all that follows and inserting ``$2,250.'', and
(2) in subparagraph (B) by striking ``the lesser of--'' and
all that follows and inserting ``$4,500.''.
(b) Conforming Amendment.--Section 223(d)(1)(A)(ii)(I) of such Code
is amended by striking ``subsection (b)(2)(B)(ii)'' and inserting
``subsection (b)(2)(B)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2006.

SEC. 4. MODIFICATION OF COST-OF-LIVING ADJUSTMENT.

Paragraph (1) of section 223(g) of the Internal Revenue Code of 1986
(relating to cost-of-living adjustment) is amended by adding at the end
the following new flush sentence:
``In the case of adjustments made for any taxable year
beginning after 2007, 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.''.

SEC. 5. CONTRIBUTION LIMITATION NOT REDUCED FOR PART-YEAR COVERAGE.

(a) Increase in Limit for Individuals Becoming Eligible Individuals
After Beginning of the Year.--Subsection (b) of section 223 of the
Internal Revenue Code of 1986 (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.--
``(A) In general.--For purposes of computing the
limitation under paragraph (1) for any taxable year, an
individual who is an eligible individual during the
last month of such taxable year shall be treated--
``(i) as having been an eligible individual
during each of the months in such taxable year,
and
``(ii) as having been enrolled, during each
of the months such individual is treated as an
eligible individual solely by reason of clause
(i), in the same high deductible health plan in
which the individual was enrolled for the last
month of such taxable year.
``(B) Failure to maintain high deductible health plan
coverage.--
``(i) In general.--If, at any time during the
testing period, the individual is not an
eligible individual, then--
``(I) gross income of the individual
for the taxable year in which occurs
the first month in the testing period
for which such individual is not an
eligible individual is increased by the
aggregate amount of all contributions
to the health savings account of the
individual which could not have been
made but for subparagraph (A), and
``(II) the tax imposed by this
chapter for any taxable year on the
individual shall be increased by 10
percent of the amount of such increase.
``(ii) Exception for disability or death.--
Subclauses (I) and (II) of clause (i) shall not
apply if the individual ceased to be an
eligible individual by reason of the death of
the individual or the individual becoming
disabled (within the meaning of section
72(m)(7)).
``(iii) Testing period.--The term `testing
period' means the period beginning with the
last month of the taxable year referred to in
subparagraph (A) and ending on the last day of
the 12th month following such month.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2006.

SEC. 6. EXCEPTION TO REQUIREMENT FOR EMPLOYERS TO MAKE COMPARABLE
HEALTH SAVINGS ACCOUNT CONTRIBUTIONS.

(a) In General.--Section 4980G of the Internal Revenue Code of 1986
(relating to failure of employer to make comparable health savings
account contributions) is amended by adding at the end the following
new subsection:
``(d) Exception.--For purposes of applying section 4980E to a
contribution to a health savings account of an employee who is not a
highly compensated employee (as defined in section 414(q)), highly
compensated employees shall not be treated as comparable participating
employees.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2006.

SEC. 7. ONE-TIME DISTRIBUTION FROM INDIVIDUAL RETIREMENT PLANS TO FUND
HSAS.

(a) In General.--Subsection (d) of section 408 of the Internal
Revenue Code of 1986 (relating to taxability of beneficiary of
employees' trust) is amended by adding at the end the following new
paragraph:
``(9) Distribution for health savings account funding.--
``(A) In general.--In the case of an individual who
is an eligible individual (as defined in section
223(c)) and who elects the application of this
paragraph for a taxable year, gross income of the
individual for the taxable year does not include a
qualified HSA funding distribution to the extent such
distribution is otherwise includible in gross income.
``(B) Qualified hsa funding distribution.--For
purposes of this paragraph, the term `qualified HSA
funding distribution' means a distribution from an
individual retirement plan (other than a plan described
in subsection (k) or (p)) of the employee to the extent
that such distribution is contributed to the health
savings account of the individual in a direct trustee-
to-trustee transfer.
``(C) Limitations.--
``(i) Maximum dollar limitation.--The amount
excluded from gross income by subparagraph (A)
shall not exceed the excess of--
``(I) the annual limitation under
section 223(b) computed on the basis of
the type of coverage under the high
deductible health plan covering the
individual at the time of the qualified
HSA funding distribution, over
``(II) in the case of a distribution
described in clause (ii)(II), the
amount of the earlier qualified HSA
funding distribution.
``(ii) One-time transfer.--
``(I) In general.--Except as provided
in subclause (II), an individual may
make an election under subparagraph (A)
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 in a taxable year 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 in such
taxable year during which the
individual has family coverage under a
high deductible health plan as of the
first day of the subsequent month.
``(D) Failure to maintain high deductible health plan
coverage.--
``(i) In general.--If, at any time during the
testing period, the individual is not an
eligible individual, then the aggregate amount
of all contributions to the health savings
account of the individual made under
subparagraph (A)--
``(I) shall be includible in the
gross income of the individual for the
taxable year in which occurs the first
month in the testing period for which
such individual is not an eligible
individual, and
``(II) the tax imposed by this
chapter for any taxable year on the
individual shall be increased by 10
percent of the amount which is so
includible.
``(ii) Exception for disability or death.--
Subclauses (I) and (II) of clause (i) shall not
apply if the individual ceased to be an
eligible individual by reason of the death of
the individual or the individual becoming
disabled (within the meaning of section
72(m)(7)).
``(iii) Testing period.--The term `testing
period' means the period beginning with the
month in which the qualified HSA funding
distribution is contributed to a health savings
account and ending on the last day of the 12th
month following such month.
``(E) Application of section 72.--Notwithstanding
section 72, in determining the extent to which an
amount is treated as otherwise includible in gross
income for purposes of subparagraph (A), the aggregate
amount distributed from an individual retirement plan
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 from all individual retirement plans were
distributed. Proper adjustments shall be made in
applying section 72 to other distributions in such
taxable year and subsequent taxable years.''.
(b) Coordination With Limitation on Contributions to HSAs.--Section
223(b)(4) of such Code (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 408(d)(9) (and such amount shall not
be allowed as a deduction under subsection (a)).''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2006.

I. Summary and Background

A. PURPOSE AND SUMMARY

Purpose

The bill, H.R. 6134, as amended, includes provisions for
encouraging the use of high deductible health plans and health
savings accounts.

Summary

Effective for distributions after the date of enactment and
before January 1, 2012, the bill allows certain amounts in a
health FSA or HRA to be rolled over into an HSA without
violating the otherwise applicable requirements for such
arrangements. With respect to coverage for taxable years
beginning after December 31, 2006, the bill allows certain FSA
coverage during a grace period following the end of a plan year
to be treated as disregarded coverage. Effective for taxable
years beginning after December 31, 2006, the bill modifies the
limit on the annual deductible contributions that can be made
to an HSA so that the maximum deductible contribution is not
limited to the annual deductible under the high deductible
health plan. Effective for adjustments made for taxable years
beginning after 2007, the bill requires an earlier indexing
period to be used in making cost-of-living adjustments for the
HSA dollar amounts that are indexed for inflation. Effective
for taxable years beginning after December 31, 2006, the bill
allows individuals who become covered under a high deductible
plan in a month other than January to make the full deductible
HSA contribution for the year if certain requirements are
satisfied. Effective for taxable years beginning after December
31, 2006, the bill provides an exception to the comparable
contribution requirements which allows employers to make larger
HSA contributions for nonhighly compensated employees than for
highly compensated employees. Effective for taxable years
beginning after December 31, 2006, the bill allows a one-time
contribution to an HSA of amounts distributed from an
individual retirement arrangement.

B. BACKGROUND AND NEED FOR LEGISLATION

Millions of Americans have no health insurance coverage.
Covering America's uninsured is a top priority for the
Congress. High deductible health plans provide an opportunity
for many uninsured individuals to afford health insurance. High
deductible health plans also promote more cost conscious health
decisions. Health savings accounts (HSAs) were effective
beginning 2004 and are available to individuals with a high
deductible health plan (and no other health plan). Health
savings accounts allow individuals to pay current medical
expenses on a tax-free basis and also to save for future
medical expenses on a tax-free basis. While relatively new to
the market, HSAs have been very popular with both individuals
and employers. The bill includes provisions that will increase
the attractiveness of HSAs.

C. LEGISLATIVE HISTORY

Background

H.R. 6134 was introduced on September 21, 2006, and was
referred to the Committee on Ways and Means.

Committee action

The Committee on Ways and Means marked up the bill on
September 27, 2006, and ordered the bill, as amended, favorably
reported.

Committee hearings

The Committee on Ways and Means held a full Committee
hearing on June 28, 2006, on health savings accounts.
The Committee held a full Committee hearing on February 15,
2006, on the President's Fiscal Year 2007 Budget with
Department of Treasury Secretary John Snow, including the
President's proposals relating to high deductible health plans
and health savings accounts.

II. Explanation of the Bill

A. PRESENT LAW

Health savings accounts

In general
Individuals with a high deductible health plan (and no
other health plan other than a plan that provides certain
permitted coverage) may establish a health savings account
(``HSA''). In general, HSAs provide tax-favored treatment for
current medical expenses as well as the ability to save on a
tax-favored basis for future medical expenses. In general, HSAs
are tax-exempt trusts or custodial accounts created exclusively
to pay for the qualified medical expenses of the account holder
and his or her spouse and dependents.
Within limits, contributions to an HSA made by or on behalf
of an eligible individual are deductible by the individual.
Contributions to an HSA are excludable from income and
employment taxes if made by the employer. Earnings on amounts
in HSAs are not taxable. Distributions from an HSA for
qualified medical expenses are not includible in gross income.
Distributions from an HSA that are not used for qualified
medical expenses are includible in gross income and are subject
to an additional tax of 10 percent. The 10-percent additional
tax does not apply if the distribution is made after death,
disability, or the individual attains the age of Medicare
eligibility (i.e., age 65).
Eligible individuals
Eligible individuals for HSAs are individuals who are
covered by a high deductible health plan and no other health
plan that is not a high deductible health plan and which
provides coverage for any benefit which is covered under the
high deductible health plan. After an individual has attained
age 65 and becomes enrolled in Medicare benefits, contributions
cannot be made to an HSA.\1\ Eligible individuals do not
include individuals who may be claimed as a dependent on
another person's tax return.
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\1\ Sec. 223(b)(7), as interpreted by Notice 2004-2, 2004-2 I.R.B.
269, corrected by Announcement 2004-67, 2004-36 I.R.B. 459.
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An individual with other coverage in addition to a high
deductible health plan is still eligible for an HSA if such
other coverage is certain permitted insurance or permitted
coverage. Permitted insurance is: (1) insurance if
substantially all of the coverage provided under such insurance
relates to (a) liabilities incurred under worker's compensation
law, (b) tort liabilities, (c) liabilities relating to
ownership or use of property (e.g., auto insurance), or (d)
such other similar liabilities as the Secretary of Treasury may
prescribe by regulations; (2) insurance for a specified disease
or illness; and (3) insurance that provides a fixed payment for
hospitalization. Permitted coverage is coverage (whether
provided through insurance or otherwise) for accidents,
disability, dental care, vision care, or long-term care.
A high deductible health plan is a health plan that, for
2006, has a deductible that is at least $1,050 for self-only
coverage or $2,100 for family coverage and that has an out-of-
pocket expense limit that is no more than $5,250 in the case of
self-only coverage and $10,500 in the case of family
coverage.\2\ Out-of-pocket expenses include deductibles, co-
payments, and other amounts (other than premiums) that the
individual must pay for covered benefits under the plan. A plan
is not a high deductible health plan if substantially all of
the coverage is for permitted coverage or coverage that may be
provided by permitted insurance, as described above. A plan
does not fail to be a high deductible health plan by reason of
failing to have a deductible for preventive care.
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\2\ The limits are indexed for inflation. The family coverage
limits always will be twice the self-only coverage limits (as indexed
for inflation). In the case of the plan using a network of providers,
the plan does not fail to be a high deductible health plan (if it would
otherwise meet the requirements of a high deductible health plan)
solely because the out-of-pocket expense limit for services provided
outside of the network exceeds the out-of-pocket expense limits. In
addition, such plan's deductible for out-of-network services is not
taken into account in determining the annual contribution limit (i.e.,
the deductible for services within the network is used for such
purpose).
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Health flexible spending arrangement (``FSAs'') and health
reimbursement arrangements (``HRAs'') are health plans that
constitute other coverage under the HSA rules. These
arrangements are discussed in more detail, below. An individual
who is covered by a high deductible health plan and a health
FSA or HRA generally is not eligible to make contributions to
an HSA. An individual is eligible to make contributions to an
HSA if the health FSA or HRA is: (1) a limited purpose health
FSA or HRA; (2) a suspended HRA; (3) a post-deductible health
FSA or HRA; or (4) a retirement HRA.\3\
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\3\ Rev. Rul. 2004-45, 2004-22 I.R.B. 1. A limited purpose health
FSA pays or reimburses benefits for permitted coverage and a limited
purpose HRA pays or reimburses benefits for permitted insurance or
permitted coverage. A limited purpose health FSA or HRA may also pay or
reimburse preventive care benefits. A suspended HRA does not pay
medical expense incurred during a suspension period except for
preventive care, permitted insurance and permitted coverage. A post-
deductible health FSA or HRA does not pay or reimburse any medical
expenses incurred before the minimum annual deductible under the HSA
rules is satisfied. A retirement HSA pays or reimburses only medical
expenses incurred after retirement.
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Tax treatment of and limits on contributions
Contributions to an HSA by or on behalf of an eligible
individual are deductible (within limits) in determining
adjusted gross income (i.e., ``above-the-line'') of the
individual. In addition, employer contributions to HSAs
(including salary reduction contributions made through a
cafeteria plan) are excludable from gross income and wages for
employment tax purposes. In the case of an employee,
contributions to an HSA may be made by both the individual and
the individual's employer. All contributions are aggregated for
purposes of the maximum annual contribution limit.
Contributions to Archer MSAs reduce the annual contribution
limit for HSAs.
The maximum aggregate annual contribution that can be made
to an HSA is the lesser of (1) 100 percent of the annual
deductible under the high deductible health plan, or (2) (for
2006) $2,700 in the case of self-only coverage and $5,450 in
the case of family coverage.\4\ The annual contribution limit
is the sum of the limits determined separately for each month,
based on the individual's status and health plan coverage as of
the first day of the month. The annual contribution limits are
increased for individuals who have attained age 55 by the end
of the taxable year. In the case of policyholders and covered
spouses who are age 55 or older, the HSA annual contribution
limit is greater than the otherwise applicable limit by $700 in
2006, $800 in 2007, $900 in 2008, and $1,000 in 2009 and
thereafter. As in determining the general annual contribution
limit, the increase in the annual contribution limit for
individuals who have attained age 55 is also determined on a
monthly basis. As previously discussed, contributions,
including catch-up contributions, cannot be made once an
individual is enrolled in Medicare.
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\4\ These amounts are indexed for inflation.
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In the case of individuals who are married to each other
and either spouse has family coverage, both spouses are treated
as having only the family coverage with the lowest annual
deductible. The annual contribution limit (without regard to
the catch-up contribution amounts) is divided equally between
the spouses unless they agree on a different division (after
reduction for amounts paid from any Archer MSA of the spouses).
An excise tax applies to contributions in excess of the
maximum contribution amount for the HSA. The excise tax
generally is equal to six percent of the cumulative amount of
excess contributions that are not distributed from the HSA.
Amounts can be rolled over into an HSA from another HSA or
from an Archer MSA.
Comparable contributions
If an employer makes contributions to employees' HSAs, the
employer must make available comparable contributions on behalf
of all employees with comparable coverage during the same
period. Contributions are considered comparable if they are
either of the same amount or the same percentage of the
deductible under the plan. If employer contributions do not
satisfy the comparability rule during a period, then the
employer is subject to an excise tax equal to 35 percent of the
aggregate amount contributed by the employer to HSAs for that
period. The comparability rule does not apply to contributions
made through a cafeteria plan.
Taxation of distributions
Distributions from an HSA for qualified medical expenses of
the individual and his or her spouse or dependents generally
are excludable from gross income. In general, amounts in an HSA
can be used for qualified medical expenses even if the
individual is not currently eligible for contributions to the
HSA.
Qualified medical expenses generally are defined as under
section 213(d) and include expenses for diagnosis, cure,
mitigation, treatment, or prevention of disease. Qualified
medical expenses do not include expenses for insurance other
than for (1) long-term care insurance, (2) premiums for health
coverage during any period of continuation coverage required by
Federal law, (3) premiums for health care coverage while an
individual is receiving unemployment compensation under Federal
or State law, or (4) in the case of an account beneficiary who
has attained the age of Medicare eligibility, health insurance
premiums for Medicare, other than premiums for Medigap
policies. Such qualified health insurance premiums include, for
example, Medicare Part A and Part B premiums, Medicare HMO
premiums, and the employee share of premiums for employer-
sponsored health insurance including employer-sponsored retiree
health insurance. Whether the expenses are qualified medical
expenses is determined as of the time the expenses were
incurred.
For purposes of determining the itemized deduction for
medical expenses, distributions from an HSA for qualified
medical expenses are not treated as expenses paid for medical
care under section 213. Distributions from an HSA that are not
for qualified medical expenses are includible in gross income.
Distributions includible in gross income also are subject to an
additional 10-percent tax unless made after death, disability,
or the individual attains the age of Medicare eligibility
(i.e., age 65).
Reporting requirements
Employer contributions are required to be reported on the
employee's Form W-2. Trustees of HSAs may be required to report
to the Secretary of the Treasury amounts with respect to
contributions, distributions, the return of excess
contributions, and other matters as determined appropriate by
the Secretary. In addition, the Secretary may require providers
of high deductible health plans to make reports to the
Secretary and to account beneficiaries as the Secretary
determines appropriate.

Health flexible spending arrangements and health reimbursement
arrangements

Arrangements commonly used by employers to reimburse
medical expenses of their employees (and their spouses and
dependents) include health flexible spending arrangements
(``FSAs'') and health reimbursement accounts (``HRAs''). Health
FSAs typically are funded on a salary reduction basis, meaning
that employees are given the option to reduce current
compensation and instead have the compensation used to
reimburse the employee for medical expenses. If the health FSA
meets certain requirements, then the compensation that is
forgone is not includible in gross income or wages and
reimbursements for medical care from the health FSA are
excludable from gross income and wages. Health FSAs are subject
to the general requirements relating to cafeteria plans,
including a requirement that a cafeteria plan generally may not
provide deferred compensation.\5\ This requirement often is
referred to as the ``use-it-or-lose-it-rule.'' Until May of
2005, this requirement was interpreted to mean that amounts
available from a health FSA as of the end of a plan year must
be forfeited by the employee. In May 2005, the Treasury
Department issued a notice that allows a grace period not to
exceed two and one-half months immediately following the end of
the plan year during which unused amounts may be used.\6\ An
individual participating in a health FSA that allows
reimbursements during a grace period is generally not eligible
to make contributions to the HSA until the first month
following the end of the grace period even if the individual's
health FSA has no unused benefits as of the end of the prior
plan year.\7\ Health FSAs are subject to certain other
requirements, including rules that require that the FSA have
certain characteristics similar to insurance.
---------------------------------------------------------------------------
\5\ Sec. 125(d)(2).
\6\ Notice 2005-42, 2005-23 I.R.B. 1204.
\7\ Notice 2005-86, 2005-49 I.R.B. 1075.
---------------------------------------------------------------------------
HRAs operate in a manner similar to health FSAs, in that
they are an employer-maintained arrangement that reimburses
employees for medical expenses. Some of the rules applicable to
HRAs and health FSAs are similar, e.g., the amounts in the
arrangements can only be used to reimburse medical expenses and
not for other purposes. Some of the rules are different. For
example, HRAs cannot be funded on a salary reduction basis and
the use-it-or-lose-it rule does not apply. Thus, amounts
remaining at the end of the year may be carried forward to be
used to reimburse medical expenses in the next year.\8\
Reimbursements for insurance covering medical care expenses are
allowable reimbursements under an HRA, but not under a health
FSA.
---------------------------------------------------------------------------
\8\ Guidance with respect to HRAs, including the interaction of
FSAs and HRAs in the case an individual is covered under both, is
provided in Notice 2002-45, 2002-2 C.B. 93.
---------------------------------------------------------------------------
As mentioned above, subject to certain limited exceptions,
health FSAs and HRAs constitute other coverage under the HSA
rules.

B. REASONS FOR CHANGE

High deductible health plans, coupled with an HSA, provide
families and individuals with the opportunity to gain better
access to affordable health care, while encouraging saving for
medical costs through tax-deductible contributions and tax-free
buildup of earnings. Since their inception in 2004, the use of
HSAs has grown rapidly. Despite this growth, the early
experience with HSAs has revealed a number of features of
present law that the Committee believes create obstacles to the
use of HSAs. The Committee bill includes provisions to address
these obstacles.
The Committee understands that HRAs and FSAs are common
features of many employer-sponsored health plans. However, in
some cases, the existence of these plans may present a barrier
to adopting high deductible plans and HSAs. Thus, the Committee
bill allows individuals in a health FSA or HRA a one-time
opportunity to roll over existing balances into an HSA. The
Committee bill also provides that, if certain requirements are
satisfied, health FSA coverage under the grace period permitted
by Treasury rules will not disqualify an individual from making
contributions to an HSA. These changes are intended to
facilitate the transition to high deductible health plans.
HSAs are designed to provide a savings vehicle to enable
individuals to pay for their out of pocket medical expenses.
However, under present law, in some cases individuals may be
concerned that the HSA may not provide sufficient opportunity
to save for possible medical expenses. For example, if an
individual enrolls in a high deductible plan during the year,
the individual may have exposure for the full deductible under
the plan, whereas the permitted contribution to the HSA is
limited by the number of months the individual was in the plan.
The Committee bill contains a number of provisions designed to
address this type of issue. Thus, the bill permits the full
contribution to an HSA for individuals who enroll during the
year. To prevent abuse of this increased contribution, the
individual must remain in a high deductible plan for 12 months.
The bill also allows a one-time rollover to an HSA from an IRA
(subject to the otherwise applicable HSA contribution limits)
and allows employers to make higher HSA contributions for
nonhighly compensated employees than for highly compensated
employees. The Committee bill permits individuals to make the
maximum dollar contribution to an HSA, regardless of the
deductible under the high deductible plan, thus allowing
individuals to save for expenses in addition to those subject
to the deductible, including expenses not covered by the high
deductible plan.
Finally, the bill modifies the method by which the cost-of-
living adjustments are made for purposes of determining whether
a plan is a high deductible plan. This change will allow
individuals, insurers, and employers to know in advance of a
year what plans will qualify an individual for an HSA.

C. EXPLANATION OF PROVISION

1. Allow rollovers from health FSAs and HRAs into HSAs for a limited
time

The provision allows certain amounts in a health FSA or HRA
to be distributed from the health FSA or HRA and contributed
through a direct transfer to an HSA without violating the
otherwise applicable requirements for such arrangements. The
amount that can be distributed from a health FSA or HRA and
contributed to an HSA may not exceed an amount equal to the
lesser of (1) the balance in the health FSA or HRA as of
September 21, 2006 or (2) the balance in the health FSA or HRA
as of the date of the distribution. The balance in the health
FSA or HRA as of any date is determined on a cash basis (i.e.,
expenses incurred that have not been reimbursed as of the date
the determination is made are not taken into account). Amounts
contributed to an HSA under the provision are excludable from
gross income and wages for employment tax purposes, are not
taken into account in applying the maximum deduction limitation
for other HSA contributions, and are not deductible.
Contributions must be made directly to the HSA before January
1, 2012. The provision is limited to one distribution with
respect to each health FSA or HRA of the individual.
The provision is designed to assist individuals in
transferring from another type of health plan to a high
deductible health plan. Thus, if an individual for whom a
contribution is made under the provision does not remain an
eligible individual during the testing period, the amount of
the contribution is includible in gross income of the
individual. An exception applies if the employee ceases to be
an eligible individual by reason of death or disability. The
testing period is the period beginning with the month of the
contribution and ending on the last day of the 12th month
following such month. The amount is includible for the taxable
year of the first day during the testing period that the
individual is not an eligible individual. A 10-percent
additional tax also applies to the amount includible.
A modified comparability rule applies with respect to
contributions under the provision. If the employer makes
available to any employee the ability to make contributions to
the HSA from distributions from a health FSA or HRA under the
provision, all employees who are covered under a high
deductible plan of the employer must be allowed to make such
distributions and contributions. The present-law excise tax
applies if this requirement is not met.
For example, suppose the balance in a health FSA as of
September 21, 2006, is $2,000 and the balance in the account as
January 1, 2008 is $3,000. Under the provision, a health FSA
will not be considered to violate applicable rules if, as of
January 1, 2008, an amount not to exceed $2,000 is distributed
from the health FSA and contributed to an HSA of the
individual. The $2,000 distribution would not be includible in
income, and the subsequent contribution would not be deductible
and would not count against the annual maximum tax deductible
contribution that can be made to the HSA. If the individual
ceases to be an eligible individual as of June 1, 2008, the
$2,000 contribution amount is included in gross income and
subject to a 10-percent additional tax. If instead the
distribution and contribution are made as of June 30, 2008,
when the balance in the health FSA is $1,500, the amount of the
distribution and contribution is limited to $1,500.
The present law rule that an individual is not an eligible
individual if the individual has coverage under a general
purpose health FSA or HRA continues to apply. Thus, for
example, if the health FSA or HRA from which the contribution
is made is a general purpose health FSA or HRA and the
individual remains eligible under such arrangement after the
distribution and contribution, the individual is not an
eligible individual.
Effective date.--The provision is effective for
distributions and contributions on or after the date of
enactment and before January 1, 2012.

2. Certain FSA coverage treated as disregarded coverage

The provision provides that, for taxable years beginning
after December 31, 2006, in certain cases, coverage under a
health flexible spending arrangement (``FSA'') during the
period immediately following the end of a plan year during
which unused benefits or contributions remaining at the end of
such plan year may be paid or reimbursed to plan participants
for qualified expenses is disregarded coverage. Such coverage
is disregarded if (1) the balance in the health FSA at the end
of the plan year is zero, or (2) in accordance with rules
prescribed by the Secretary of Treasury, the entire remaining
balance in the health FSA at the end of the plan year is
contributed to an HSA as provided under another provision of
the bill.\9\
---------------------------------------------------------------------------
\9\ The amount that can be contributed is limited to the balance in
the health FSA as of September 21, 2006.
---------------------------------------------------------------------------
Thus, for example, if as of December 31, 2006, a
participant's health FSA balance is zero, coverage under the
health FSA during the period from January 1, 2007, until March
15, 2007 (i.e., the ``grace period'') is disregarded in
determining if tax deductible contributions can be made to an
HSA for that period. Similarly, if the entire balance in an
individual's health FSA as of December 31, 2006, is distributed
and contributed to an HSA (as under another provision of the
bill) coverage during the health FSA grace period is
disregarded.
It is intended that the Secretary will provide guidance
under the provision with respect to the timing of health FSA
distributions contributed to an HSA in order to facilitate such
rollovers and the establishment of HSAs in connection with high
deductible plans. For example, it is intended that the
Secretary would provide rules under which coverage is
disregarded if, before the end of a year, an individual elects
high deductible plan coverage and to contribute any remaining
FSA balance to an HSA in accordance with the provision even if
the trustee-to-trustee transfer cannot be completed until the
following plan year. Similar rules apply for the general
provision allowing amounts from a health FSA or HRA to be
contributed to an HSA in order to facilitate such contributions
at the beginning of an employee's first year of HSA
eligibility.
The provision does not modify the permitted health FSA
grace period allowed under existing Treasury guidance.
Effective date.--The provision is effective after the date
of enactment with respect to coverage for taxable years
beginning after December 31, 2006.

3. Repeal of annual plan deductible limitation on HSA contribution
limitation

The provision modifies the limit on the annual deductible
contributions that can be made to an HSA so that the maximum
deductible contribution is not limited to the annual deductible
under the high deductible health plan. Under the provision, the
maximum aggregate annual contribution that can be made to an
HSA is $2,700 (as indexed for inflation after 2006) in the case
of self-only coverage and $5,450 (as indexed for inflation
after 2006) in the case of family coverage.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2006.

4. Earlier indexing of cost of living adjustments

Under the provision, in the case of adjustments made for
any taxable year beginning after 2007, the Consumer Price Index
for a calendar year is determined as of the close of the 12-
month period ending on March 31 of the calendar year (rather
than August 31 as under present law) for the purpose of making
cost-of-living adjustments for the HSA dollar amounts that are
indexed for inflation (i.e., the contribution limits and the
high-deductible health plan requirements). The provision also
requires the Secretary of Treasury to publish the adjusted
amounts for a year no later than June 1 of the preceding
calendar year.
Effective date.--The provision is effective for adjustments
made for taxable years beginning after 2007.

5. Allow full contribution for months preceding month that taxpayer is
an eligible individual

In general, the provision allows individuals who become
covered under a high deductible plan in a month other than
January to make the full deductible HSA contribution for the
year. Under the provision, an individual who is an eligible
individual during the last month of a taxable year is treated
as having been an eligible individual during every month during
the taxable year for purposes of computing the amount that may
be contributed to the HSA for the year. Thus, such individual
is allowed to make contributions for months before the
individual was enrolled in a high deductible health plan. For
the months preceding the last month of the taxable year that
the individual is treated as an eligible individual solely by
reason of the provision, the individual is treated as having
been enrolled in the same high deductible health plan in which
the individual was enrolled during the last month of the
taxable year.
If an individual makes contributions under the provision
and does not remain an eligible individual during the testing
period, the amount of the contributions attributable to months
preceding the month in which the individual was an eligible
individual which could not have been made but for the provision
are includible in gross income. An exception applies if the
employee ceases to be an eligible individual by reason of death
or disability. The testing period is the period beginning with
the last month of the taxable year and ending on the last day
of the 12th month following such month. The amount is
includible for the taxable year of the first day during the
testing period that the individual is not an eligible
individual. A 10-percent additional tax also applies to the
amount includible.
For example, suppose individual ``A'' enrolls in high
deductible plan ``H'' in December of 2007 and is otherwise an
eligible individual in that month. A was not an eligible
individual in any other month in 2007. A may make HSA
contributions as if she had been enrolled in plan H for all of
2007. If A ceases to be an eligible individual (e.g., if she
ceases to be covered under the high deductible health plan) in
June 2008, an amount equal to the HSA deduction attributable to
treating A as an eligible individual for January through
November 2007 is included in income in 2008. In addition, a 10-
percent additional tax applies to the amount includible.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2006.

6. Modify employer comparable contribution requirements for
contributions made to nonhighly compensated employees

The provision provides an exception to the comparable
contribution requirements which allows employers to make larger
HSA contributions for nonhighly compensated employees than for
highly compensated employees. Highly compensated employees are
defined as under section 414(q) and include any employee who
was (1) a five-percent owner at any time during the year or the
preceding year; or (2) for the preceding year, (A) had
compensation from the employer in excess of $100,000 \10\ (for
2006) and (B) if elected by the employer, was in the group
consisting of the top-20 percent of employees when ranked based
on compensation. Nonhighly compensated employees are employees
not included in the definition of highly compensated employee
under section 414(q).
---------------------------------------------------------------------------
\10\ This amount is indexed for inflation.
---------------------------------------------------------------------------
The comparable contribution rules continue to apply to the
contributions made to nonhighly compensated employees so that
the employer must make available comparable contributions on
behalf of all nonhighly compensated employees with comparable
coverage during the same period.
For example, an employer is permitted to make a $1,000
contribution to the HSA of each nonhighly compensated employee
for a year without making contributions to the HSA of each
highly compensated employee.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2006.

7. One-time rollovers from IRAs into HSAs

The provision allows a one-time contribution to an HSA of
amounts distributed from an individual retirement arrangement
(``IRA''). The contribution must be made in a direct trustee-
to-trustee transfer. Amounts distributed from an IRA under the
provision are not includible in income to the extent that the
distribution would otherwise be includible in income. In
addition, such distributions are not subject to the 10-percent
additional tax on early distributions.
In determining the extent to which amounts distributed from
the IRA would otherwise be includible in income, the aggregate
amount distributed from the IRA is treated as includible in
income to the extent of the aggregate amount which would have
been includible if all amounts were distributed from all IRAs
of the same type (i.e., in the case of a traditional IRA, there
is no pro-rata distribution of basis). As under present law,
this rule is applied separately to Roth IRAs and other IRAs.
The amount that can be distributed from the IRA and
contributed to an HSA is limited to the otherwise maximum
deductible contribution amount to the HSA computed on the basis
of the type of coverage under the high deductible health plan
at the time of the contribution. The amount that can otherwise
be contributed to the HSA for the year of the contribution from
the IRA is reduced by the amount contributed from the IRA. No
deduction is allowed for the amount contributed from an IRA to
an HSA.
Under the provision, only one distribution and contribution
may be made during the lifetime of the individual, except that
if a distribution and contribution are made during a month in
which an individual has self-only coverage as of the first day
of the month, an additional distribution and contribution may
be made during a subsequent month within the taxable year in
which the individual has family coverage. The limit applies to
the combination of both contributions.
If the individual does not remain an eligible individual
during the testing period, the amount of the distribution and
contribution is includible in gross income of the individual.
An exception applies if the employee ceases to be an eligible
individual by reason of death or disability. The testing period
is the period beginning with the month of the contribution and
ending on the last day of the 12th month following such month.
The amount is includible for the taxable year of the first day
during the testing period that the individual is not an
eligible individual. A 10-percent additional tax also applies
to the amount includible.
The provision does not apply to simplified employee
pensions (``SEPs'') or to SIMPLE retirement accounts.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2006.

III. Votes of the Committee

In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means in its
consideration of the bill, H.R. 6134, the ``Health Opportunity
Patient Empowerment Act of 2006''.

MOTION TO REPORT THE BILL

The bill, H.R. 6134, was ordered favorably reported, as
amended, by a rollcall vote of 24 yeas to 14 nays (with a
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... X ........ ......... Mr. Stark........ ........ X .........
Mr. Shaw....................... X ........ ......... Mr. Levin........ ........ X .........
Mrs. Johnson................... X ........ ......... Mr. Cardin....... ........ X .........
Mr. Herger..................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. McCrery.................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Camp....................... X ........ ......... Mr. McNulty...... ........ ........ .........
Mr. Ramstad.................... X ........ ......... Mr. Tanner....... ........ X .........
Mr. Nussle..................... X ........ ......... Mr. Becerra...... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. English.................... X ........ ......... Mr. Pomeroy...... ........ X .........
Mr. Hayworth................... X ........ ......... Ms. Tubbs Jones.. ........ X .........
Mr. Weller..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Hulshof.................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Lewis (KY)................. X ........ ......... Mr. Emanuel...... ........ X .........
Mr. Foley...................... X ........ ......... ................. ........ X .........
Mr. Brady...................... X ........ ......... ................. ........ X .........
Mr. Reynolds................... X ........ .........
Mr. Ryan....................... X ........ .........
Mr. Cantor..................... X ........ .........
Mr. Linder..................... X ........ .........
Mr. Beauprez................... X ........ .........
Ms. Hart....................... X ........ .........
Mr. Chocola.................... X ........ .........
Mr. Nunes...................... X ........ .........
----------------------------------------------------------------------------------------------------------------

IV. Budget Effects of the Bill

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of the rule XIII of the
Rules of the House of Representatives, the following statement
is made concerning the effects on the budget of the revenue
provisions of the bill, H.R. 6134 as reported.
The bill is estimated to have the following effects on
budget receipts for fiscal years 2007-2011:

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX EXPENDITURES BUDGET
AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue reducing tax
provisions involve increased tax expenditures. (See amounts in
table in Part IV.A., above.)

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.

U.S. Congress,
Congressional Budget Office,
Washington, DC, September 28, 2006.
Hon. William ``Bill'' M. Thomas,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 6134, the Health
Opportunity Patient Empowerment Act of 2006.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Emily
Schlect.
Sincerely,
Donald B. Marron,
Acting Director.
Enclosure.

H.R. 6134--Health Opportunity Patient Empowerment Act of 2006

Summary: H.R. 6134 would make various changes to rules
regarding health savings accounts (HSAs). It would allow fully
deductible contributions for the entire year in which a high-
deductible insurance policy is purchased, repeal certain
limitations on HSA contributions, and allow a one-time rollover
of funds from certain other accounts into HSAs, among other
changes.
The Joint Committee on Taxation (JCT) estimates that
enacting H.R. 6134 would reduce federal revenues by $23 million
in 2007, by $287 million over the 2007-2011 period, and by $1.0
billion over the 2007-2016 period. These estimates include
reductions in off-budget receipts from Social Security payroll
taxes of $3 million in 2007, $30 million over the 2007-2011
period, and $147 million over the 2007-2016 period. The
Congressional Budget Office (CBO) estimates that enacting H.R.
6134 would not affect direct spending.
JCT has determined that the legislation contains no
private-sector or intergovernmental mandates as defined in the
Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 6134 is shown in the following table.

--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
---------------------------------------------------------------------------------------
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES

Allowing Fully Deductible Contributions for Prior Months........ -11 -29 -33 -36 -37 -37 -35 -33 -28 -22
Repealing a Limitation on HSA Contributions..................... -10 -17 -27 -30 -38 -50 -66 -115 -170 -190
Allowing a Rollover of Certain Funds Into an HSA................ -2 -4 -4 -4 -5 -2 0 0 0 0
Estimated Revenues.............................................. -23 -50 -64 -70 -80 -89 -101 -148 -198 -212
On-Budget................................................... -20 -46 -58 -63 -70 -78 -87 -125 -164 -177
Off-Budget a................................................ -3 -4 -6 -7 -10 -11 -14 -23 -34 -35
--------------------------------------------------------------------------------------------------------------------------------------------------------
a A portion of the revenue loss from each of the three provisions affects off-budget receipts. However, the only significant off-budget effects are from
the provision repealing a limitation on HSA contributions. The estimated off-budget effects of the other two provisions are negligible.
Source: The Joint Committee on Taxation.
Note: HSA = Health Savings Account.

Basis of estimate: H.R. 6134 would change rules regarding
health savings accounts. JCT estimates that enacting H.R. 6134
would reduce federal revenues by $23 million in 2007, by $287
million over the 2007-2011 period, and by $1.04 billion over
the 2007-2016 period. These estimates include reductions in
off-budget receipts from Social Security payroll taxes of $3
million in 2007, $30 million over the 2007-2011 period, and
$148 million over the 2007-2016 period.
Three provisions of the bill would have significant effects
on revenues, JCT estimates. First, the bill would permit
taxpayers starting an HSA partway through a year to contribute
up to the full annual limit. The taxpayer must, however,
maintain a high-deductible health plan for a full year or pay
tax and penalty on the contribution. JCT estimates that this
provision would reduce revenues by $11 million in 2007, by $147
million over the 2007-2011 period, and by $302 million over the
2007-2016 period.
Second, H.R. 6134 would repeal the limitation on
contributions to HSAs that corresponds to the annual deductible
under the high-deductible insurance policy. Under current law,
contributions are limited to the lesser of the annual
deductible or a specified amount (currently $2,700 for single
coverage and $5,450 for family coverage) that is indexed for
inflation. JCT estimates that this provision would reduce
revenues by $10 million in 2007, by $121 million over the 2007-
2011 period, and by $712 million over the 2007-2016 period. Of
those revenue reductions, a portion would be off-budget--
totaling $148 million over the 2007-2016 period.
Finally, the bill would allow employees to start an HSA by
making a one-time transfer of amounts in a health reimbursement
account for flexible spending account as of September 21, 2006.
Such a transfer would have to be completed by January 1, 2012.
JCT estimates that the provision would reduce revenues by $2
million in 2007, by $19 million over the 2007-2011 period, and
by $21 million over the 2007-2016 period.
Intergovernmental and private-sector impact: JCT has
determined that the legislation contains no private-sector or
intergovernmental mandates as defined in UMRA.
Estimated prepared by: Emily Schlect.
Estimated approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis.

D. MACROECONOMIC IMPACT ANALYSIS

In compliance with clause 3(h)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made by the staff of Joint Committee on Taxation with respect
to the provisions of the bill amending the Internal Revenue
Code of 1986: the effects of the bill on economic activity are
so small as to be incalculable within the context of a model of
the aggregate economy.

V. Other Matters To Be Discussed Under the Rules of the House

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was a result of the Committee's
oversight review concerning Americans' need for health
insurance coverage and the need to save for medical expenses
that the Committee concluded that it is appropriate and timely
to enact the provisions included in the bill as reported.

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of the rule XIII of the
Rules of the House of Representatives (relating to
Constitutional Authority), the Committee states that the
Committee's action in reporting this bill is derived from
Article I of the Constitution, Section 8 (``The Congress shall
have Power To lay and collect Taxes, Duties, Imposts and
Excises . . .''), and from the 16th Amendment to the
Constitution.

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (Pub. L. No. 104-4).
The Committee has determined that the revenue provisions of
the bill do not contain Federal mandates on the private sector.
The Committee has determined that the revenue provision of the
bill do not impose a Federal intergovernmental mandate on
State, local, or tribal governments. With respect to the non-
revenue provisions of the bill, see the CBO letter in part
IV.C., above.

E. APPLICABILITY OF HOUSE RULE XXI 5(B)

Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the provisions of the bill, and states that
the provisions of the bill do not involve any Federal income
tax rate increases within the meaning of the rule.

F. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the Senate Committee on
Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
(the ``Code'') and has widespread applicability to individuals
or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Code and that have ``widespread
applicability'' to individuals or small businesses.

G. TAX EARMARKS

Pursuant to House Resolution 1000, the staff of the Joint
Committee on Taxation has determined that the bill as reported
contains no tax earmarks within the meaning of that Resolution.

VI. Changes in Existing Law Made by the Bill, as Reported

In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):

INTERNAL REVENUE CODE OF 1986

Subtitle A--Income Taxes

* * * * * * *

CHAPTER 1--NORMAL TAXES AND SURTAXES

* * * * * * *

Subchapter B--Computation of Taxable Income

* * * * * * *

PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

* * * * * * *

SEC. 106. CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND HEALTH PLANS.

(a) * * *

* * * * * * *

(e) FSA and HRA Terminations to Fund HSAs.--
(1) In general.--A plan shall not fail to be treated
as a health flexible spending arrangement or health
reimbursement arrangement under this section or section
105 merely because such plan provides for a qualified
HSA distribution.
(2) Qualified hsa distribution.--The term ``qualified
HSA distribution'' means a distribution from a health
flexible spending arrangement or health reimbursement
arrangement to the extent that such distribution--
(A) does not exceed the lesser of the balance
in such arrangement on September 21, 2006, or
as of the date of such distribution, and
(B) is contributed by the employer directly
to the health savings account of the employee
before January 1, 2012.
Such term shall not include more than 1 distribution
with respect to any arrangement.
(3) Additional tax for failure to maintain high
deductible health plan coverage.--
(A) In general.--If, at any time during the
testing period, the employee is not an eligible
individual, then the amount of the qualified
HSA distribution--
(i) shall be includible in the gross
income of the employee for the taxable
year in which occurs the first month in
the testing period for which such
employee is not an eligible individual,
and
(ii) the tax imposed by this chapter
for such taxable year on the employee
shall be increased by 10 percent of the
amount which is so includible.
(B) Exception for disability or death.--
Clauses (i) and (ii) of subparagraph (A) shall
not apply if the employee ceases to be an
eligible individual by reason of the death of
the employee or the employee becoming disabled
(within the meaning of section 72(m)(7)).
(4) Definitions and special rules.--For purposes of
this subsection.--
(A) Testing period.--The term ``testing
period'' means the period beginning with the
month in which the qualified HSA distribution
is contributed to the health savings account
and ending on the last day of the 12th month
following such month.
(B) Eligible individual.--The term ``eligible
individual'' has the meaning given such term by
section 223(c)(1).
(C) Treatment as rollover contribution.--A
qualified HSA distribution shall be treated as
a rollover contribution described in section
223(f)(5).
(5) Tax treatment relating to distributions.--For
purposes of this title.--
(A) In general.--A qualified HSA distribution
shall be treated as a payment described in
subsection (d).
(B) Comparability excise tax.--
(i) In general.--Except as provided
in clause (ii), section 4980G shall not
apply to qualified HSA distributions.
(ii) Failure to offer to all
employees.--In the case of a qualified
HSA distribution to any employee, the
failure to offer such distribution to
any eligible individual covered under a
high deductible health plan of the
employer shall (notwithstanding section
4980G(d)) be treated for purposes of
section 4980G as a failure to meet the
requirements of section 4980G(b).

* * * * * * *

PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

* * * * * * *

SEC. 223. HEALTH SAVINGS ACCOUNTS.

(a) * * *
(b) Limitations.--
(1) * * *
(2) Monthly limitation.--The monthly limitation for
any month 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,
[the lesser of--
[(i) the annual deductible under such
coverage, or
[(ii) $2,250, or] $2,250.
(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,
[the lesser of--
[(i) the annual deductible under such
coverage, or
[(ii) $4,500.] $4,500.

* * * * * * *

(4) Coordination with other contributions.--The
limitation which would (but for this paragraph) apply
under this subsection to an individual for any taxable
year shall be reduced (but not below zero) by the sum
of--
(A) the aggregate amount paid for such
taxable year to Archer MSAs of such individual,
[and]
(B) the aggregate amount contributed to
health savings accounts of such individual
which is excludable from the taxpayer's gross
income for such taxable year under section
106(d) (and such amount shall not be allowed as
a deduction under subsection (a))[.], and
(C) the aggregate amount contributed to
health savings accounts of such individual for
such taxable year under section 408(d)(9) (and
such amount shall not be allowed as a deduction
under subsection (a)).

* * * * * * *

(8) Increase in limit for individuals becoming
eligible individuals after the beginning of the year.--
(A) In general.--For purposes of computing
the limitation under paragraph (1) for any
taxable year, an individual who is an eligible
individual during the last month of such
taxable year shall be treated--
(i) as having been an eligible
individual during each of the months in
such taxable year, and
(ii) as having been enrolled, during
each of the months such individual is
treated as an eligible individual
solely by reason of clause (i), in the
same high deductible health plan in
which the individual was enrolled for
the last month of such taxable year.
(B) Failure to maintain high deductible
health plan coverage.--
(i) In general.--If, at any time
during the testing period, the
individual is not an eligible
individual, then--
(I) gross income of the
individual for the taxable year
in which occurs the first month
in the testing period for which
such individual is not an
eligible individual is
increased by the aggregate
amount of all contributions to
the health savings account of
the individual which could not
have been made but for
subparagraph (A), and
(II) the tax imposed by this
chapter for any taxable year on
the individual shall be
increased by 10 percent of the
amount of such increase.
(ii) Exception for disability or
death.--Subclauses (I) and (II) of
clause (i) shall not apply if the
individual ceased to be an eligible
individual by reason of the death of
the individual or the individual
becoming disabled (within the meaning
of section 72(m)(7)).
(iii) Testing period.--The term
``testing period'' means the period
beginning with the last month of the
taxable year referred to in
subparagraph (A) and ending on the last
day of the 12th month following such
month.
(c) Definitions and special rules.--For purposes of this
section.--
(1) Eligible individual
(A) * * *
(B) Certain coverage disregarded.--
Subparagraph (A)(ii) 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[.], and
(iii) for taxable years beginning
after December 31, 2006, coverage under
a health flexible spending arrangement
during any period immediately following
the end of a plan year of such
arrangement during which unused
benefits or contributions remaining at
the end of such plan year may be paid
or reimbursed to plan participants for
qualified benefit expenses incurred
during such period if--
(I) the balance in such
arrangement at the end of such
plan year is zero, or
(II) the individual is making
a qualified HSA distribution
(as defined in section 106(e))
in an amount equal to the
remaining balance in such
arrangement as of the end of
such plan year, in accordance
with rules prescribed by the
Secretary.

* * * * * * *

(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 described in subsection (f)(5) or
section 220(f)(5), no contribution will be
accepted--
(i) * * *
(ii) to the extent such contribution,
when added to previous contributions to
the trust for the calendar year,
exceeds the sum of--
(I) the dollar amount in
effect under [subsection
(b)(2)(B)(ii)] subsection
(b)(2)(B), and

* * * * * * *

(g) Cost-of-living adjustment.--
(1) In general.--Each dollar amount in subsections
(b)(2) and (c)(2)(A) shall be increased by an amount
equal to--
(A) * * *

* * * * * * *

In the case of adjustments made for any taxable year
beginning after 2007, 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.

* * * * * * *

Subchapter D--Deferred Compensation, etc.

* * * * * * *

PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.

* * * * * * *

Subpart A--General Rule

* * * * * * *

SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.

(a) * * *

* * * * * * *

(d) Tax treatment of distributions.--
(1) * * *

* * * * * * *

(9) Distribution for health savings account
funding.--
(A) In general.--In the case of an individual
who is an eligible individual (as defined in
section 223(c)) and who elects the application
of this paragraph for a taxable year, gross
income of the individual for the taxable year
does not include a qualified HSA funding
distribution to the extent such distribution is
otherwise includible in gross income.
(B) Qualified hsa funding distribution.--For
purposes of this paragraph, the term
``qualified HSA funding distribution'' means a
distribution from an individual retirement plan
(other than a plan described in subsection (k)
or (p)) of the employee to the extent that such
distribution is contributed to the health
savings account of the individual in a direct
trustee-to-trustee transfer.
(C) Limitations.--
(i) Maximum dollar limitation.--The
amount excluded from gross income by
subparagraph (A) shall not exceed the
excess of--
(I) the annual limitation
under section 223(b) computed
on the basis of the type of
coverage under the high
deductible health plan covering
the individual at the time of
the qualified HSA funding
distribution, over
(II) in the case of a
distribution described in
clause (ii)(II), the amount of
the earlier qualified HSA
funding distribution.
(ii) One-time transfer.--
(I) In general.--Except as
provided in subclause (II), an
individual may make an election
under subparagraph (A) 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 in a taxable year 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 in such
taxable year during which the
individual has family coverage
under a high deductible health
plan as of the first day of the
subsequent month.
(D) Failure to maintain high deductible
health plan coverage.--
(i) In general.--If, at any time
during the testing period, the
individual is not an eligible
individual, then the aggregate amount
of all contributions to the health
savings account of the individual made
under subparagraph (A)--
(I) shall be includible in
the gross income of the
individual for the taxable year
in which occurs the first month
in the testing period for which
such individual is not an
eligible individual, and
(II) the tax imposed by this
chapter for any taxable year on
the individual shall be
increased by 10 percent of the
amount which is so includible.
(ii) Exception for disability or
death.--Subclauses (I) and (II) of
clause (i) shall not apply if the
individual ceased to be an eligible
individual by reason of the death of
the individual or the individual
becoming disabled (within the meaning
of section 72(m)(7)).
(iii) Testing period.--The term
``testing period'' means the period
beginning with the month in which the
qualified HSA funding distribution is
contributed to a health savings account
and ending on the last day of the 12th
month following such month.
(E) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which an amount is treated as
otherwise includible in gross income for
purposes of subparagraph (A), the aggregate
amount distributed from an individual
retirement plan 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
from all individual retirement plans were
distributed. Proper adjustments shall be made
in applying section 72 to other distributions
in such taxable year and subsequent taxable
years.

* * * * * * *

Subtitle D--Miscellaneous Excise Taxes

* * * * * * *

CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

* * * * * * *

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

(a) * * *

* * * * * * *

(d) Exception.--For purposes of applying section 4980E to a
contribution to a health savings account of an employee who is
not a highly compensated employee (as defined in section
414(q)), highly compensated employees shall not be treated as
comparable participating employees.

* * * * * * *

VII. DISSENTING VIEWS

Get your facts first, then you can distort them as you
please.--Mark Twain
Passage of H.R. 6134 is reckless and inappropriate. Health
Savings Accounts (HSAs) have only been available since 2004 and
we have limited information about the effect of these products
on the insurance market. Neither the Department of Treasury nor
the Joint Committee on Taxation were able to provide any
evidence at the mark-up of H.R. 6134 that the changes made in
the bill are warranted. Before we allocate an additional
billion dollars to expand,\1\ Congress should have more
information. Furthermore, given the potential of HSAs to
displace or otherwise undermine more comprehensive health
insurance benefits offered through employers--which cover
nearly 60 percent of the working population--Congress should
not create additional incentives to proliferate these schemes.
---------------------------------------------------------------------------
\1\ Joint Committee on Taxation estimate of HR 6134, September 25,
2006.
---------------------------------------------------------------------------
Preliminary analysis by the Government Accountability
Office (GAO)--the only independent source to review available
IRS data from tax returns--shows that HSAs primarily benefit
individuals in the highest tax bracket.\2\ Specifically, the
GAO found that the average adjusted gross income of tax filers
reporting HSA contributions in 2004 was $133,000, compared to
$51,000 for all tax filers under age 65 in 2004. The GAO also
found that more than half of tax filers with HSAs in 2004 did
not make any withdrawals, indicating that these accounts are
used primarily as a tax shelter. Another survey found that 20
percent of employers admit that they established HSAs primarily
as a tax shelter for their workers.\3\
---------------------------------------------------------------------------
\2\ Government Accountability Office, GAO 06-798: ``Consumer-
Directed Health Plans. Early Enrollee Experiences with Health Savings
Accounts and Eligible Health Plans.'' Washington, DC; August 2006.
\3\ Mercer Human Resources Consulting, ``2005 National Survey of
Employer-Sponsored Health Plans.'' Washington, DC; April 3, 2006.
---------------------------------------------------------------------------
Proponents of HSAs often claim that they will help the
uninsured. They cite data from the insurance industry showing
approximately one-third of the people enrolling in high-
deductible health insurance plans that qualify for an HSA were
previously uninsured. But this finding is not unique to high
deductible/HSA plans; it is true for all plans purchased
through the individual and small group market. Indeed, the
number of people in the United States without health insurance
has increased by two million since HSAs took effect in 2004,
and the most recent data from the Census Bureau indicate that
nearly 47 million Americans are uninsured, a disgraceful new
record.
Not surprisingly, the Joint Committee on Taxation (JCT)
estimates that H.R. 6134 will do virtually nothing to help the
uninsured, having only a ``negligible effect'' on the number of
people with health insurance.\4\ Moreover, the JCT also
estimates that H.R. 6134 will result in just 300,000 additional
people opening an HSA over the next 10 years, further stating
that ``almost all of these accountholders would have been
previously insured.'' \5\ Thus, rather than providing
assistance to those truly in need, H.R. 6134 gives an
additional tax break to people who already have health
insurance. In the current fiscal environment and in light of
other more pressing matters before this Congress, we believe it
is irresponsible to give an additional billion dollars in tax
breaks to top wage earners.
---------------------------------------------------------------------------
\4\ Joint Committee on Taxation estimate of HR 6134, September 25,
2006.
\5\ ibid.
---------------------------------------------------------------------------
In these waning days of the 109th Congress, there are much
better ways to spend $1 billion. As Rep. Becerra highlighted
during the mark-up, if Congress does not act to supplement
funding for the State Children's Health Insurance Program (S-
CHIP), 600,000 children across America will likely lose their
health insurance coverage next year. The S-CHIP shortfall would
cost less than the $1 billion being spent on H.R. 6134.
Maintaining health insurance for children is a much more
important endeavor than providing yet another tax-preferred
savings vehicle that will primarily benefit the rich.
Even if we were inclined to support the legislation--which
we are not--it would still be too soon to act. Although tax
records are available from 2004--the first year HSAs were
available--the Department of the Treasury has repeatedly
refused to release data that would inform the debate on HSAs.
Nor has Treasury released assumptions behind their budget
estimates on HSAs despite our repeated annual written
requests.\6\ Again, it is wrong for Congress to expand this
new, untested program without a more complete picture of its
beneficiaries and the broader implications of HSAs.
---------------------------------------------------------------------------
\6\ Congressman Stark Letter to Secretary Snow, Department of the
Treasury, February 8, 2005 and Congressmen McDermott and Stark Letter
to Secretary Snow, Department of the Treasury, February 17, 2006.
---------------------------------------------------------------------------
The single positive outcome of the Committee action on H.R.
6134 is that we have received a commitment from the Chairman to
make a joint request to the Treasury to release the IRS data on
HSAs for 2004 and, even if preliminary, 2005. As Thomas
Jefferson said, ``Information is the currency of democracy.''
We look forward to working with the Chairman in this endeavor.

Sander Levin.
Jim McDermott.
Michael R. McNulty.
Rahm Emanuel.
Richard E. Neal.
Ben Cardin.
Stephanie Tubbs Jones.
C.B. Rangel.
Pete Stark.
Lloyd Doggett.
Xavier Becerra.
John B. Larson.
John Lewis.