S. 2496 - Small Business Health Account Act of 2018

115TH CONGRESS
2D SESSION

S. 2496

To amend the Internal Revenue Code of 1986
to establish Small Business Health Accounts.

IN THE SENATE OF THE UNITED STATES

MARCH 5, 2018

Mr. ENZI introduced the following bill; which was read
twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to establish Small Business Health Accounts.

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

SECTION 1. SHORT TITLE.

This Act may be cited as the "Small Business Health Account Act of 2018".

SEC. 2. SMALL BUSINESS HEALTH ACCOUNTS.

(a) IN GENERAL. — Part VIII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by redesignating section 224 as section 225 and inserting after section 223 the following new section:

"SEC. 224. SMALL BUSINESS HEALTH 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 or on behalf of such individual to a small business health 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) in the case of an eligible individual who is not described in subparagraph (B), $3,400, or

"(B) in the case of an eligible individual who is a head of a household or married (within the meaning of section 7703) and filing a joint return under section 6013 for the taxable year, $6,750.

"(3) ADDITIONAL CONTRIBUTIONS FOR INDIVIDUALS 55 OR OLDER. — In the case of an individual who has attained age 55 before the close of the taxable year, the applicable limitation under subparagraphs (A) and (B) of paragraph (2) shall be increased by $1,000.

"(4) COORDINATION WITH OTHER CONTRIBUTIONS. —

"(A) IN GENERAL. — 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 —

"(i) the aggregate amount paid for such taxable year to Archer MSAs of such individual,

"(ii) the aggregate amount contributed to small business health 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

"(iii) the aggregate amount contributed to small business health accounts of such individual for such taxable year under section 408(d)(10) (and such amount shall not be allowed as a deduction under subsection (a)).

"(B) EXCEPTION. — Subparagraph (A)(i) shall not apply with respect to any individual to whom paragraph (5) applies.

"(5) SPECIAL RULE FOR MARRIED INDIVIDUALS. — In the case of individuals who are married to each other, the limitation under paragraph (1) (without regard to any additional contribution amount under paragraph (3)) —

"(A) shall be reduced by the aggregate amount paid to Archer MSAs of such spouses for the taxable year, and

"(B) after such reduction, shall be divided equally between them unless they agree on a different division.

"(6) DENIAL OF DEDUCTIONS TO DEPENDENTS. — No deduction shall be allowed under this section to any individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual's taxable year begins.

"(7) MEDICARE ELIGIBLE INDIVIDUALS. — The limitation under this subsection for any month with respect to an individual shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter.

"(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 as having been an eligible individual during each of the months in such taxable year.

"(B) FAILURE TO MAINTAIN ELIGIBILITY. —

"(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 small business health 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) ARCHER MSA. — The term 'Archer MSA' has the meaning given such term in section 220(d).

"(2) ELIGIBLE INDIVIDUAL. — The term 'eligible individual' means, with respect to any month, any individual if —

"(A) such individual is employed by a small business, and

"(B) except as provided under subsection (f)(5)(B), no cash has been paid during such month by or on behalf of such individual to a health savings account under section 223.

"(3) SMALL BUSINESS. — The term 'small business' means a small business concern (as defined under section 3 of the Small Business Act (15 U.S.C. 632)).

"(d) SMALL BUSINESS HEALTH ACCOUNT. — For purposes of this section —

"(1) IN GENERAL. — The term 'small business health account' means a trust created or organized in the United States as a small business health 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) unless it is in cash, or

"(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), and

"(II) the dollar amount in effect under subsection (b)(3).

"(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 their account is nonforfeitable.

"(2) QUALIFIED MEDICAL EXPENSES. —

"(A) IN GENERAL. — The term 'qualified medical expenses' means, with respect to an account beneficiary, amounts paid by such beneficiary for —

"(i) medical care (as defined in section 213(d)) for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise, and

"(ii) coverage under a health plan.

"(B) PRESCRIBED DRUG. — The term 'qualified medical expenses' shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

"(C) PROHIBITION. —

"(i) IN GENERAL. — The term 'qualified medical expenses' shall not include any amount paid for —

"(I) an abortion,

"(II) any health plan coverage described in clause (ii) of subparagraph (A) which includes coverage for abortion, or

"(III) any prescribed drug, as described in subparagraph (B), for an abortion.

"(ii) EXCEPTION. — This subparagraph shall not apply in the case of —

"(I) a pregnancy which is the result of an act of rape or incest, or

"(II) a woman who suffers from a physical disorder, physical injury, or physical illness that would, as certified by a physician, place the woman in danger of death unless an abortion is performed, including a life-endangering physical condition caused by or arising from the pregnancy itself.

"(3) ACCOUNT BENEFICIARY. — The term 'account beneficiary' means the individual on whose behalf the small business health account was established.

"(4) CERTAIN RULES TO APPLY. — Rules similar to the rules described in section 223(d)(4) shall apply for purposes of this section.

"(e) TAX TREATMENT OF ACCOUNTS. — Rules similar to the rules described in section 223(e) shall apply for purposes of this section.

"(f) TAX TREATMENTS OF DISTRIBUTIONS. —

"(1) AMOUNTS USED FOR QUALIFIED MEDICAL EXPENSES. — Any amount paid or distributed out of a small business health 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. — Any amount paid or distributed out of a small business health 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.

"(3) EXCESS CONTRIBUTIONS RETURNED BEFORE DUE DATE OF RETURN. —

"(A) IN GENERAL. — If any excess contribution is contributed for a taxable year to any small business health account of an individual, paragraph (2) shall not apply to distributions from the small business health 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 received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual's return for such taxable year, and

"(ii) such distribution is accompanied by the amount of net income attributable to such excess contribution.

Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received.

"(B) EXCESS CONTRIBUTION. — For purposes of subparagraph (A), the term 'excess contribution' means any contribution (other than a rollover contribution described in paragraph (5) or section 220(f)(5)) which is neither excludable from gross income under section 6(d) nor deductible under this section.

"(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 small business health account of such beneficiary which is includible in gross income under paragraph (2) shall be increased by 20 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) EXCEPTIONS 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) ROLLOVER CONTRIBUTION. —

"(A) IN GENERAL. — An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraph (B).

"(B) ROLLOVER CONTRIBUTION RULES. —

"(i) IN GENERAL. — Paragraph (2) shall not apply to any amount paid or distributed from —

"(I) a health savings account (as described in section 223(d)) to the account beneficiary to the extent the amount received is paid into a small business health account, or

"(II) a small business health account to the account beneficiary to the extent the amount received is paid into a small business health account or a health savings account,

for the benefit of such beneficiary not later than the 60th day after the day on which the beneficiary receives the payment or distribution.

"(ii) LIMITATION. — This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from a health savings account or a small business health account if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (A) from a health savings account or a small business account which was not includible in the individual's gross income because of the application of this paragraph.

"(6) ADDITIONAL RULES. — Rules similar to the rules described in paragraphs (6) through (8) of section 223(e) shall apply for purposes of this section.

"(g) COST-OF-LIVING ADJUSTMENT. —

"(1) IN GENERAL. — In the case of any taxable year beginning after 2019, each dollar amount in subsection (b)(2) shall be increased by an amount equal to —

"(A) such dollar amount, multiplied by

"(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins determined by substituting 'calendar year 2018' for 'calendar year 2016' in subparagraph (A)(ii) thereof.

"(2) ROUNDING. — If any increase under paragraph (1) is not a multiple of $50, such increase shall be rounded to the nearest multiple of $50.

"(h) REPORTS. —

"(1) IN GENERAL. — The Secretary may require the trustee of a small business health account to make such reports regarding such account to the Secretary and to the account beneficiary with respect to contributions, distributions, the return of excess contributions, and such other matters as the Secretary determines appropriate.

"(2) TIME AND MANNER. — 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.".

(b) CONFORMING AMENDMENTS. —

(1) Paragraph (2) of section 26(b) of the Internal Revenue Code of 1986 is amended —

(A) in subparagraph (S), by inserting "224(b)(8)(i)(II)," after "223(b)(8)(i)(II),", and

(B) by striking subparagraph (U) and inserting the following:

"(U) sections 223(f)(4) and 224(f)(4) (relating to additional tax on health savings account distributions and small business heath account distributions not used for qualified medical expenses),".

(2) Paragraph (3) of section 35(g) of such Code is amended by striking "or from a health savings account (as defined in section 223(d))" and inserting ", a health savings account (as defined in section 223(d)), or a small business health account (as defined in section 224(d))".

(3) Paragraph (19) of section 62(a) of such Code is amended to read as follows:

"(19) HEALTH SAVINGS ACCOUNTS AND SMALL BUSINESS HEALTH ACCOUNTS. — The deductions allowed by sections 223 and 224.".

(4) Subsection (d) of section 106 of such Code of 1986 is amended —

(A) in the heading, by inserting "AND SMALL BUSINESS HEALTH ACCOUNTS",

(B) in paragraph (1), by striking "IN GENERAL" in the heading and inserting "HEALTH SAVINGS ACCOUNTS",

(C) by redesignating paragraphs (2) and

(3) as paragraphs (3) and (4), respectively, and

(D) by inserting after paragraph (1) the following new paragraph:

"(2) SMALL BUSINESS HEALTH ACCOUNTS. — In the case of an employee who is an eligible individual (as defined in section 224(c)(2)), amounts contributed by such employee's employer to any small business health account (as defined in section 224(d)) 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 limitation under section 224(b) (determined without regard to this subsection) which is applicable to such employee for such taxable year.".

(5) Subparagraph (A) of section 220(f)(5) of such Code is amended by striking "or a health savings account (as defined in section 223(d))" and inserting ", a health savings account (as defined in section 223(d)), or a small business health account (as defined in section 224(d))".

(6) Subsection (d) of section 408 of such Code is amended by adding at the end the following new paragraph:

"(10) DISTRIBUTION FOR SMALL BUSINESS HEALTH ACCOUNT FUNDING. —

"(A) IN GENERAL. — In the case of an individual who is an eligible individual (as defined in section 224(c)(2)) 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 SBHA funding distribution to the extent such distribution is otherwise includible in gross income.

"(B) QUALIFIED SBHA FUNDING DISTRIBUTION. — For purposes of this paragraph, the term 'qualified SBHA 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 small business health 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 applicable annual limitation under section 224(b) at the time of the qualified SBHA funding distribution.

"(ii) ONE-TIME TRANSFER. — An individual may make an election under subparagraph (A) only for one qualified SBHA funding distribution during the lifetime of the individual. Such an election, once made, shall be irrevocable.

"(D) FAILURE TO MAINTAIN ELIGIBILITY. —

"(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 small business health 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 SBHA funding distribution is contributed to a small business health 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.".

(7) Subparagraph (B) of section 848(e)(1) of such Code is amended —

(A) in clause (iv), by striking "and" at the end,

(B) in clause (v), by striking the period at the end and inserting ", and", and

(C) by adding at the end the following new clause:

"(vi) any contract which is a small business health account (as defined in section 224(d)).".

(8) Paragraph (2) of section 877A(e) of such Code is amended by inserting "a small business health account (as defined in section 224)," after "a health savings account (as defined in section 223)".

(9) Subsection (a) of section 4973 of such Code is amended —

(A) in paragraph (5), by striking "or" at the end,

(B) by redesignating paragraph (6) as paragraph (7), and

(C) by inserting after paragraph (5) the following new paragraph:

"(6) a small business health account (within the meaning of section 224(d)), or".

(10) Section 4975 of such Code is amended —

(A) in subsection (c), by adding at the end the following new paragraph:

"(7) SPECIAL RULE FOR SMALL BUSINESS HEALTH ACCOUNTS. — An individual for whose benefit a small business health account (within the meaning of section 224(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 small business health account by reason of the application of section 224(e) to such account.", and

(B) in paragraph (1) of subsection (e) —

(i) by redesignating subparagraphs (F) and (G) as subparagraphs (G) and (H), respectively, and

(ii) by inserting after subparagraph (E) the following new subparagraph:

"(F) a small business health account described in section 224(d),".

(11) Subsection (a) of section 6051 of such Code is amended —

(A) by redesignating paragraphs (13) through (17) as paragraphs (14) through (18), respectively, and

(B) by inserting after paragraph (12) the following new paragraph:

"(13) the amount contributed to any small business health account (as defined in section 4(d)) of such employee or such employee's spouse,".

(12) Paragraph (2) of section 6693(a) of such Code is amended —

(A) by redesignating subparagraphs (D) through (F) as subparagraphs (E) through (G), respectively, and

(B) by inserting after subparagraph (C) the following new subparagraph:

"(D) section 224(h) (relative to small business health accounts),".

(13) The table of sections for part VII of subchapter B of chapter 1 of such Code is amended by redesignating the item relating to section 224 as relating to section 225 and by inserting after the item relating to section 223 the following new item:

"Sec. 224. Small Business Health Accounts.".

(c) EFFECTIVE DATE. — The amendments made by this section shall apply to taxable years beginning after December 31, 2018.