Transition to non-deductible HSAs

(a) Non-Deductible HSAs Subchapter F of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new part: IX Roth health savings accounts Sec. 530A. Roth HSAs. 530A. Roth HSAs (a) In general A Roth HSA shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, the Roth HSA shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations). No deduction shall be allowed for any contribution to a Roth HSA. (b) Dollar limitation (1) In general The aggregate amount of contributions for any taxable year to all Roth HSAs maintained for the benefit of an individual shall not exceed the sum of the monthly limitations for any month 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 has self-only creditable coverage as of the first day of such month, $5,000, and (B) in the case of an eligible individual who has family creditable coverage as of the first day of such month, the amount in effect under subparagraph (A) for the taxable year multiplied by the number of individuals (including the eligible individual) covered under such family creditable coverage as of such day. (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 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, (B) the aggregate amount contributed to Roth HSAs 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 Roth HSAs 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)). Subparagraph (A) 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, if either spouse has family coverage— (A) both spouses shall be treated as having only such family coverage (and if such spouses each have family coverage under different plans, as having the family coverage with the lowest annual deductible), and (B) the limitation under paragraph (1) (after the application of subparagraph (A) and without regard to any additional contribution amount under paragraph (3))— (i) shall be reduced by the aggregate amount paid to Archer MSAs of such spouses for the taxable year, and (ii) after such reduction, shall be divided equally between them unless they agree on a different division. (6) Denial of deduction to dependents No contribution may be made to a Roth HSA under this section by 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) 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 creditable 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 Roth HSA 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) Roth HSA For purposes of this section— (1) In general The term Roth HSA means a trust created or organized in the United States as a Roth HSA 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)(B), 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 his account is nonforfeitable. (2) Qualified medical expenses For purposes of this section— (A) In general The term qualified medical expenses means, with respect to an account beneficiary, amounts paid by such beneficiary for 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. (B) Limitation on health insurance purchased from account Such term shall not include any payment for health benefits coverage that is not creditable coverage (as defined in section 36C). (C) Exceptions Subparagraph (B) shall not apply to any expense for coverage under— (i) a health plan during any period of continuation coverage required under any Federal law, (ii) a qualified long-term care insurance contract (as defined in section 7702B(b)), (iii) a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law, or (iv) in the case of an account beneficiary who has attained the age specified in section 1811 of the Social Security Act, any health insurance other than a medicare supplemental policy (as defined in section 1882 of the Social Security Act). (3) Account beneficiary The term account beneficiary means the individual on whose behalf the Roth HSA was established. (4) Certain rules to apply Rules similar to the following rules shall apply for purposes of this section: (A) Section 219(f)(3) (relating to time when contributions deemed made). (B) Except as provided in section 106(d), section 219(f)(5) (relating to employer payments). (C) Section 408(g) (relating to community property laws). (D) Section 408(h) (relating to custodial accounts). (d) Eligible individual; creditable coverage For purposes of this section— (1) Eligible individual (A) In general The term eligible individual means, with respect to any month, any individual if such individual is covered under creditable coverage as of the first day of such month. (B) Exception An individual shall not be treated as an eligible individual for any month for which a credit is determined with respect to the individual under section 36B. (2) Creditable coverage The term creditable coverage shall have the meaning given such term in section 36C(f). (e) Tax treatment of distributions (1) Amounts used for qualified medical expenses Any amount paid or distributed out of a Roth HSA 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 Roth HSA 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 Roth HSA of an individual, paragraph (2) shall not apply to distributions from the Roth HSAs 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 exceeds the contribution limitation with respect to the individual for the taxable year. (4) Additional tax on distributions not used for qualified medical expenses (A) In general The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a Roth HSA of such beneficiary which is includible in gross income under paragraph (2) shall be increased by 10 percent of the amount which is so includible. (B) Exception for disability or death Subparagraph (A) shall not apply if the payment or distribution is made after the account beneficiary becomes disabled within the meaning of section 72(m)(7) or dies. (C) Exception for distributions after medicare eligibility Subparagraph (A) shall not apply to any payment or distribution after the date on which the account beneficiary attains the age specified in section 1811 of the Social Security Act. (5) Rollover contribution An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). (A) In general Paragraph (2) shall not apply to any amount paid or distributed from a health savings account (as defined in section 223) or a Roth HSA to the account beneficiary to the extent the amount received is paid into a Roth HSA for the benefit of such beneficiary not later than the 60th day after the day on which the beneficiary receives the payment or distribution. (B) Limitation This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from a health savings account or a Roth HSA 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 Roth HSA which was not includible in the individual’s gross income because of the application of this paragraph. (6) Transfer of account incident to divorce The transfer of an individual’s interest in a Roth HSA to an individual’s spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) shall not be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as a Roth HSA with respect to which such spouse is the account beneficiary. (7) Treatment after death of account beneficiary If an individual acquires an account beneficiary’s interest in a health savings account by reason of the death of the account beneficiary, such health savings account shall be treated as if the individual were the account beneficiary. (f) Cost-of-Living adjustment (1) In general In the case of any calendar year beginning after 2026, the $5,000 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, determined— (i) by substituting calendar year 2023 for calendar year 1992 in subparagraph (B) thereof, and (ii) by substituting CPI medical care component for CPI. (2) CPI medical care component For purposes of this paragraph, the term CPI medical care component means the medical care component for the Consumer Price Index for All Urban Consumers published by the Department of Labor. (3) Rounding If the amount of any increase under the preceding sentence is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50. (g) Reports The Secretary may require— (1) the trustee of a Roth HSA 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, and (2) any person who provides an individual with creditable coverage to make such reports to the Secretary and to the account beneficiary with respect to such plan as the Secretary determines appropriate. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary. (h) Cross-Reference For contributions from Medicare Advantage plans of chronically ill enrollees, see section 1852(a)(3)(D)(ii)(I) of the Social Security Act.. (b) Limit on contributions to deductible health savings accounts Section 223 of such Code is amended by adding at the end the following new subsection: (i) Limited contributions after 2025 (1) In general No contribution may be accepted by a health savings account after December 31, 2025. (2) Exceptions Paragraph (1) shall not apply— (A) in the case of a rollover contribution described in subsection (f)(5) or section 220(f)(5), or (B) in the case of a month for which an individual is covered by insurance that constitutes medical care and that is provided by an employer with respect to which an election is in effect for such month under section 131(b) of the Health Care Fairness for All Act.. (c) Clerical amendment The table of parts for subchapter F of chapter 1 of such Code is amended by adding at the end the following new item: Part IX. Roth health savings accounts. (d) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2025.