Income limitation on deductible contributions to health savings accounts

(a) In general Section 223(b) is amended by adding at the end the following new paragraph: (9) Limitation based on modified adjusted gross income (A) In general The amount otherwise allowable as a deduction under subsection (a) shall be reduced (but not below zero) by an amount which bears the same ratio to the amount so allowable (determined without regard to this paragraph) as— (i) the amount (if any) by which the taxpayer’s modified adjusted gross income exceeds the applicable income threshold, bears to (ii) $40,000 ($20,000 in the case of a married individual filing a separate return). (B) Applicable income threshold For purposes of this paragraph, the term applicable income threshold means— (i) in the case of a joint return or surviving spouse (as defined in section 2(a)), $300,000, (ii) in the case of a head of household, $250,000, (iii) in the case of a married individual filing a separate return, $150,000, and (iv) in any other case, $200,000. (C) Modified adjusted gross income For purposes of this paragraph, the term modified adjusted gross income means adjusted gross income determined without regard to this section and sections 911, 931, and 933.. (b) Treatment of non-deductible contributions (1) Rules for distribution Section 223(f)(2) is amended is amended by striking shall be included in the gross income of such beneficiary. and inserting shall be included in the gross income of the beneficiary as provided in section 72. Rules similar to the rules of section 408(d)(2) shall apply for purposes of the preceding sentence.. (2) Coordination with excise tax on excess contributions Section 4973(g)(1) is amended by inserting (determined without regard to section 223(b)(9)) after section 223. (c) Payroll taxes (1) FICA Section 3121(a) is amended by striking or at the end of paragraph (22), by striking the period at the end of paragraph (23) and inserting; or, and by inserting afer paragraph (23) the following new paragraph: (24) (A) for purposes of section 3101, any payment excludable from the employee’s gross income under section 106(d), and (B) for purposes of any other provision of this chapter (including section 3102), any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(d).. (2) Railroad Retirement Section 3231(e)(11) is amended to read as follows: (11) (A) for purposes of section 3201, any payment excludable from the employee’s gross income under section 106(d), and (B) for purposes of any other provision of this chapter (including section 3202), any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(d);. (d) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2025. (2) Payroll taxes The amendments made by subsection (c) shall apply to payments made after December 31, 2025.