1Authorizing employees of the Commonwealth and political
2subdivisions to establish health savings accounts; and
3providing for the requirements of health savings accounts and
4for tax exemption under certain circumstances.

5The General Assembly of the Commonwealth of Pennsylvania
6hereby enacts as follows:

7Section 1. Short title.

8This act shall be known and may be cited as the Government
9Employee Health Savings Account Act.

10Section 2. Definitions.

11The following words and phrases when used in this act shall
12have the meanings given to them in this section unless the
13context clearly indicates otherwise:

14"Deductible." The total deductible for an eligible
15individual and all the dependents of that eligible individual
16for a calendar year.

17"Dependent." The spouse or child of an eligible individual
18as defined in section 152 of the Internal Revenue Code of 1986

1(Public Law 99-514, 26 U.S.C. § 152).

2"Eligible individual." An individual taxpayer, including an
3employee of an employer who is a government employee, who
4contributes to a health savings account on the employee's behalf
5and who:

6(1) Must be covered by a high deductible health plan
7individually or with a dependent.

8(2) May not be covered under any health plan that is not
9a high deductible health plan, except for:

10(i) Coverage for accidents.

11(ii) Workers' compensation insurance.

12(iii) Insurance for a specified disease or illness.

13(iv) Insurance paying a fixed amount per day per
14hospitalization.

15(v) Tort liabilities.

16(3) Establishes or on whose behalf the health savings
17account is established.

18"Employer." The Commonwealth and any political subdivision
19that employs an individual.

20"Government employee." An individual employed by the
21Commonwealth or a political subdivision.

22"Health savings account" or "account." A trust or custodian
23established in this Commonwealth pursuant to a health savings
24account program exclusively to pay the qualified medical
25expenses of an eligible individual or the individual's
26dependents, but only if the written governing instrument
27creating the account meets the following requirements:

28(1) Except in the case of a rollover contribution, no
29contribution will be accepted:

30(i) unless it is in cash; or

1(ii) to the extent such contribution, when added to
2the previous contributions to the account for the
3calendar year, exceeds 100% of the eligible individual's
4deductible or $2,600 for an individual or $5,150 per
5family, whichever is lower.

6(2) The trustee or custodian is a bank, an insurance
7company or another person approved by the Secretary of Health
8and Human Services.

9(3) No part of the trust assets will be invested in life
10insurance contracts.

11(4) The assets of the account will not be commingled
12with other property except as allowed for under Individual
13Retirement Accounts.

14(5) The eligible individual's interest in the account is
15nonforfeitable.

16"Health savings account program" or "program." A program
17that includes all of the following:

18(1) The purchase by an eligible individual or by an
19employer of a high deductible health plan.

20(2) The contribution into a health savings account by an
21eligible individual or on behalf of an employee or by the
22employer. The total annual contribution may not exceed the
23amount of the plan's higher deductible or the amounts listed
24in paragraph (1)(ii) of the definition "health savings
25account" or "account."

26"High deductible." The term means:

27(1) In the case of self-only coverage, an annual
28deductible increased each year by a cost-of-living adjustment
29that is not less than $1,000 and the sum of the annual
30deductible and other annual out-of-pocket expenses required

1to be paid under a plan for covered benefits and that does
2not exceed $5,000.

3(2) In the case of family coverage, an annual deductible
4increased each year by a cost-of-living adjustment of not
5less than $2,000 and the sum of the annual deductible and
6other annual out-of-pocket expenses required to be paid under
7a plan for covered benefits and that does not exceed $10,000.

8A plan shall not fail to be treated as a high deductible plan by
9reason of its failure to include a deductible for preventive
10care or, in the case of a network plan, for having out-of-pocket
11expenses that exceed these limits on an annual deductible for
12services provided outside the network.

13"High deductible health plan." A health coverage policy,
14certificate or contract that provides for payments for covered
15benefits that exceed the higher deductible.

16"Qualified medical expense." An expense paid by a taxpayer
17for medical care described in section 213(d) of the Internal
18Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 213(d)).

19Section 3. Applicability and scope.

20(a) General rule.--The provisions of this act shall apply
21also to taxpayers who do not receive preferred Federal tax
22treatment for a health savings account under section 223 of the
23Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 
24223).

25(b) Annual limitation on deposits.--For taxable years
26beginning after December 31, 2011, a resident of this
27Commonwealth or an employer shall be allowed to deposit
28contributions to a health savings account. The amount of deposit
29shall not exceed the amount of the plan's high deductible, nor
30$2,600 for an individual policy and $5,150 for a family policy.

1(c) Tax exemption.--Except as provided in section 5,
2principal contributed to and interest earned on a health savings
3account and money reimbursed to an eligible individual or an
4employee for qualified medical expenses are exempt from taxation
5under the act of March 4, 1971 (P.L.6, No.2), known as the Tax
6Reform Code of 1971.

7Section 4. Distribution of funds from health savings accounts.

8(a) General rule.--A trustee or custodian of a health
9savings account shall utilize the funds held in the health
10savings account solely for the purpose of paying the qualified
11medical expenses of the eligible individual or the individual's
12dependents or to purchase a health coverage policy certificate
13or contract if the eligible individual is receiving unemployment
14compensation, is exercising continuation privileges under
15Federal law or is purchasing a long-term care insurance
16contract, or to pay for health insurance other than a Medicare
17supplemental policy for those who are Medicare eligible.

18(b) Restriction of use of funds.--Funds held in a health
19savings account may not be used to cover expenses of an eligible
20individual or the individual's dependents that are otherwise
21covered, including, but not limited to, a medical expense
22covered pursuant to an automobile insurance policy, workers'
23compensation insurance policy or self-insured plan or another
24employer-funded health coverage policy, certificate or contract.

25Section 5. Withdrawals from health savings accounts.

26(a) General rule.--Subject to the provisions of this
27section, an eligible individual may withdraw money from the
28individual's health savings account for any purpose, other than
29a purpose described in section 4(a).

30(b) Tax consequences of certain withdrawals.--Subject to the

1provisions of subsection (c), if an eligible individual
2withdraws money from the individual's health savings account for
3any purpose, other than a purpose described in section 4(a) at
4any other time, all of the following apply:

5(1) The amount of the withdrawal is income under the act
6of March 4, 1971 (P.L.6, No.2), known as the Tax Reform Code
7of 1971, in the tax year of the withdrawal.

8(2) Interest earned on the account during the tax year
9in which a withdrawal under this subsection is made is income
10for the purposes of the Tax Reform Code of 1971.

11(c) Effect of bankruptcy.--The amount of disbursement of any
12assets of a health savings account pursuant to a filing for
13protection under 11 U.S.C. (relating to bankruptcy) by an
14eligible individual or person for whose benefit the account was
15established is not considered a withdrawal for purposes of this
16section. The amount of the disbursement is not subject to
17taxation under the Tax Reform Code of 1971 and subsection (b)
18does not apply.

19(d) Transfers between spouses or former spouses.--The
20transfer of an eligible individual's interest in a health
21savings account to an eligible individual's spouse or former
22spouse shall not be considered a taxable transfer made by such
23eligible individual, notwithstanding any other provision of this
24act and this interest shall, after the transfer, be treated as a
25health savings account with respect to which the spouse is the
26eligible individual.

27(e) Effect of eligible individual's death.--Upon the death
28of the eligible individual, the trustee or custodian shall
29distribute the principal and accumulated interest of the health
30savings account to the estate of the deceased.

1(f) Effect of changed employment.--If an employee becomes
2employed with a different employer that participates in a health
3savings account program, the employee may transfer his or her
4health savings account to that new employer's trustee or
5custodian or to an individually purchased account program.

6Section 20. Effective date.

7This act shall take effect in 60 days.