SB857 SD1.DOC

THE SENATE	S.B. NO.	857
TWENTY-SIXTH LEGISLATURE, 2011		S.D. 1
STATE OF HAWAII

A BILL FOR AN ACT

RELATING TO MEDICAL SAVINGS ACCOUNTS.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. Chapter 235, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part . Medical Savings Accounts

§235-A Medical savings account act; establishment. This Act shall be known and may be cited as the "Medical Savings Account Act".

§235-B Establishment of accounts. (a) After December 31, 2011, an employer may offer to establish medical savings accounts.

(b) An employee on whose behalf a medical savings account has not been established by the employee's employer may establish a medical savings account on the employee's own behalf.

(c) Each year an employer may contribute to an employee's medical savings account an amount that shall not exceed $3,000.

(d) If an employer establishes a medical savings account for an employee but contributes less than the maximum set forth in subsection (c), the employee may contribute the difference in accordance with section 235-C.

§235-C Employee contributions; pretax. (a) All employee contributions to medical savings accounts shall be made on a pretax basis and are subject to the same limitations as employer contributions.

(b) An employee shall elect to make contributions to a medical savings account by signing a written election. The election shall be in the form prescribed by the director of taxation and shall be signed prior to the date the employer withholds the first contribution.

§235-D Employer contributions; tax deduction. Employer contributions to employee medical savings accounts shall constitute a deduction from the employer's state taxable income.

§235-E Distributions. (a) A medical savings account holder shall submit documentation of eligible medical expenses paid during the tax year to the account administrator, and the account administrator shall reimburse the account holder for related expenses.

(b) Moneys may be distributed from a medical savings account only for the purpose of:

(1) Reimbursing the eligible medical expenses of the account holder or the account holder's spouse or dependent child;

(2) Cashing out the balance in the medical savings account of a deceased account holder; or

(3) Cashing out an account holder's prior year's balance.

(c) An account holder may withdraw the balance in the account holder's medical savings account for any reason if the withdrawal occurs after the end of the year in which the moneys were contributed; however, the distributed moneys shall be subject to state income tax pursuant to section 235-G.

§235-F Restrictions. An account holder shall not use medical savings account moneys to fund a policy that covers the deductible for a qualified higher deductible health plan.

§235-G Taxation of account moneys. (a) Account moneys, including interest income, shall not be included as Hawaii adjusted gross income if they are:

(1) In an employee's medical savings account; or

(2) Withdrawn to pay for eligible medical expenses.

(b) Medical savings account moneys shall be included as Hawaii adjusted gross income when those moneys are withdrawn for purposes other than the payment of eligible medical expenses.

(c) Upon the death of the account holder, the medical savings account principal and any accumulated interest shall be distributed to and taxed as part of the decedent's estate, as provided by law.

§235-H Portability. An account holder shall be considered the owner of the medical savings account and may change the account administrator upon leaving the employ of the account holder's employer."

SECTION 2. In codifying the new sections added by section 1 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

SECTION 3. If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act, which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

SECTION 4. This Act shall take effect on July 1, 2050; provided that this Act shall apply to taxable years beginning after December 31, 2011.