Home / Blog / H.R.1 – One Big Beautiful Bill Act - Part 3 - Investing in Health of American Families and Workers
H.R.1 – One Big Beautiful Bill Act – Part 3 – Investing in Health of American Families and Workers
By: Gene Ennis – Core Documents, Inc.
Bradenton, FL May 29, 2025 – Core Documents is closely monitoring the new H.R.1 – One Big Beautiful Bill Act and its provisions that would rebrand the Individual Coverage HRA (ICHRA) effective January 1, 2026 into the CHOICE HRA, an acronym for the Custom Health Option and Individual Care Expense arrangement.
As of May 29, 2025, the “Big Beautiful Bill,” officially known as the One Big Beautiful Bill Act (H.R. 1), has passed the U.S. House of Representatives but has not yet been approved by the Senate.
For your convenience I have copied sections of the H.R.1 – One Big Beautiful Bill Act that pertain to the ICHRA being rebranded as the CHOICE HRA and Cafeteria Plans effective January 1, 2026.
PART 3—INVESTING IN HEALTH OF AMERICAN FAMILIES AND WORKERS
Sec. 110201. Treatment of health reimbursement arrangements integrated with individual market coverage.
Sec. 110202. Participants in CHOICE arrangement eligible for purchase of Exchange insurance under cafeteria plan.
Sec. 110203. Employer credit for CHOICE arrangement.
Sec. 110204. Individuals entitled to part A of Medicare by reason of age allowed to contribute to health savings accounts.
Sec. 110205. Treatment of direct primary care service arrangements.
Sec. 110206. Allowance of bronze and catastrophic plans in connection with health savings accounts.
Sec. 110207. On-site employee clinics.
Sec. 110208. Certain amounts paid for physical activity, fitness, and exercise treated as amounts paid for medical care.
Sec. 110209. Allow both spouses to make catch-up contributions to the same health savings account.
Sec. 110210. FSA and HRA terminations or conversions to fund HSAs.
Sec. 110211. Special rule for certain medical expenses incurred before establishment of health savings account.
Sec. 110212. Contributions permitted if spouse has health flexible spending arrangement.
Sec. 110213. Increase in health savings account contribution limitation for certain individuals.
SEC. 110201. Treatment of health reimbursement arrangements integrated with individual market coverage.
(a) In general.—Section 9815(b) is amended—
(1) by striking “Exception.—Notwithstanding subsection (a)” and inserting the following: “Exceptions.—
“(1) SELF-INSURED GROUP HEALTH PLANS.—Notwithstanding subsection (a)”, and
(2) by adding at the end the following new paragraph:
“(2) CUSTOM HEALTH OPTION AND INDIVIDUAL CARE EXPENSE ARRANGEMENTS.—
“(A) IN GENERAL.—For purposes of this subchapter, a custom health option and individual care expense arrangement shall be treated as meeting the requirements of section 9802 and sections 2705, 2711, 2713, and 2715 of title XXVII of the Public Health Service Act.
“(B) CUSTOM HEALTH OPTION AND INDIVIDUAL CARE EXPENSE ARRANGEMENTS DEFINED.—For purposes of this section, the term ‘custom health option and individual care expense arrangement’ means a health reimbursement arrangement—
“(i) which is an employer-provided group health plan funded solely by employer contributions to provide payments or reimbursements for medical care subject to a maximum fixed dollar amount for a period,
“(ii) under which such payments or reimbursements may only be made for medical care provided during periods during which the individual is covered—
“(I) under individual health insurance coverage (other than coverage that consists solely of excepted benefits), or
“(II) under part A and B of title XVIII of the Social Security Act or part C of such title,
“(iii) which meets the nondiscrimination requirements of subparagraph (C),
“(iv) which meets the substantiation requirements of subparagraph (D), and
“(v) which meets the notice requirements of subparagraph (E).
“(C) NONDISCRIMINATION.—
“(i) IN GENERAL.—An arrangement meets the requirements of this subparagraph if an employer offering such arrangement to an employee within a specified class of employee—
“(I) offers such arrangement to all employees within such specified class on the same terms, and
“(II) does not offer any other group health plan (other than an account-based group health plan or a group health plan that consists solely of excepted benefits) to any employees within such specified class.
In the case of an employer who offers a group health plan provided through health insurance coverage in the small group market (that is subject to section 2701 of the Public Health Service Act) to all employees within such specified class, subclause (II) shall not apply to such group health plan.
“(ii) SPECIFIED CLASS OF EMPLOYEE.—For purposes of this subparagraph, any of the following may be designated as a specified class of employee:
“(I) Full-time employees.
“(II) Part-time employees.
“(III) Salaried employees.
“(IV) Non-salaried employees.
“(V) Employees whose primary site of employment is in the same rating area.
“(VI) Employees who are included in a unit of employees covered under a collective bargaining agreement to which the employer is subject (determined under rules similar to the rules of section 105(h)).
“(VII) Employees who have not met a group health plan, or health insurance issuer offering group health insurance coverage, waiting period requirement that satisfies section 2708 of the Public Health Service Act.
“(VIII) Seasonal employees.
“(IX) Employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)).
“(X) Such other classes of employees as the Secretary may designate.
An employer may designate (in such manner as is prescribed by the Secretary) two or more of the classes described in the preceding subclauses as the specified class of employees to which the arrangement is offered for purposes of applying this subparagraph.
“(iii) SPECIAL RULE FOR NEW HIRES.—An employer may designate prospectively so much of a specified class of employees as are hired after a date set by the employer. Such subclass of employees shall be treated as the specified class for purposes of applying clause (i).
“(iv) RULES FOR DETERMINING TYPE OF EMPLOYEE.—For purposes for clause (ii), any determination of full-time, part-time, or seasonal employment status shall be made under rules similar to the rules of section 105(h) or 4980H, whichever the employer elects for the plan year. Such election shall apply with respect to all employees of the employer for the plan year.
“(v) PERMITTED VARIATION.—For purposes of clause (i)(I), an arrangement shall not fail to be treated as provided on the same terms within a specified class merely because the maximum dollar amount of payments and reimbursements which may be made under the terms of the arrangement for the year with respect to each employee within such class—
“(I) increases as additional dependents of the employee are covered under the arrangement, and
“(II) increases with respect to a participant as the age of the participant increases, but not in excess of an amount equal to 300 percent of the lowest maximum dollar amount with respect to such a participant determined without regard to age.
“(D) SUBSTANTIATION REQUIREMENTS.—An arrangement meets the requirements of this subparagraph if the arrangement has reasonable procedures to substantiate—
“(i) that the participant and any dependents are, or will be, enrolled in coverage described in subparagraph (B)(ii) as of the beginning of the plan year of the arrangement (or as of the beginning of coverage under the arrangement in the case of an employee who first becomes eligible to participate in the arrangement after the date notice is given with respect to the plan under subparagraph (E) (determined without regard to clause (iii) thereof), and
“(ii) any requests made for payment or reimbursement of medical care under the arrangement and that the participant and any dependents remain so enrolled.
“(E) NOTICE.—
“(i) IN GENERAL.—Except as provided in clause (iii), an arrangement meets the requirements of this subparagraph if, under the arrangement, each employee eligible to participate is, not later than 60 days before the beginning of the plan year, given written notice of the employee’s rights and obligations under the arrangement which—
“(I) is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and
“(II) is written in a manner calculated to be understood by the average employee eligible to participate.
“(ii) NOTICE REQUIREMENTS.—Such notice shall include such information as the Secretary may by regulation prescribe.
“(iii) NOTICE DEADLINE FOR CERTAIN EMPLOYEES.—In the case of an employee—
“(I) who first becomes eligible to participate in the arrangement after the date notice is given with respect to the plan under clause (i) (determined without regard to this clause), or
“(II) whose employer is first established fewer than 120 days before the beginning of the first plan year of the arrangement,
the requirements of this subparagraph shall be treated as met if the notice required under clause (i) is provided not later than the date the arrangement may take effect with respect to such employee.”.
(b) Inclusion of CHOICE arrangement permitted benefits on W–2.—
(1) IN GENERAL.—Section 6051(a), as amended by the preceding provisions of this Act, is amended by striking “and” at the end of paragraph (18), by striking the period at the end of paragraph (19) and inserting “, and”, and by inserting after paragraph (19) the following new paragraph:
“(20) the total amount of permitted benefits for enrolled individuals under a custom health option and individual care expense arrangement (as defined in section 9815(b)(2)) with respect to such employee.”.
(c) Treatment of current rules relating to certain arrangements.—
(1) NO INFERENCE.—To the extent not inconsistent with the amendments made by this section—
(A) no inference shall be made from such amendments with respect to the rules prescribed in the Federal Register on June 20, 2019, (84 Fed. Reg. 28888) relating to health reimbursement arrangements and other account-based group health plans, and
(B) any reference to custom health option and individual care expense arrangements shall for purposes of such rules be treated as including a reference to individual coverage health reimbursement arrangements.
(2) OTHER CONFORMING OF RULES.—The Secretary of the Treasury, the Secretary of Health and Human Services, and the Secretary of Labor shall modify such rules as may be necessary to conform to the amendments made by this section.
(d) Effective date.—The amendments made by this section shall apply to plan years beginning after December 31, 2025.
SEC. 110202. Participants in CHOICE arrangement eligible for purchase of Exchange insurance under cafeteria plan.
(a) In general.—Section 125(f)(3) is amended by adding at the end the following new subparagraph:
“(C) EXCEPTION FOR PARTICIPANTS IN CHOICE ARRANGEMENT.—Subparagraph (A) shall not apply in the case of an employee participating in a custom health option and individual care expense arrangement (within the meaning of section 9815(b)(2)) offered by the employee’s employer.”.
(b) Effective date.—The amendment made by this section shall apply to taxable years beginning after December 31, 2025.
SEC. 110203. Employer credit for CHOICE arrangement.
(a) In general.—Subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end the following new section:
“SEC. 45BB. Employer credit for CHOICE arrangement.
“(a) In general.—For purposes of section 38, in the case of an eligible employer, the CHOICE arrangement credit determined under this section for any taxable year is an amount, with respect to each employee enrolled during the credit period in a CHOICE arrangement maintained by the employer, equal to—
“(1) $100 multiplied by the number of months for which the employee is so enrolled during the first year in the credit period, and
“(2) one-half of the dollar amount in effect under paragraph (1) for the taxable year, multiplied by the number of months for which the employee is so enrolled during the second year of the credit period.
“(b) Arrangement must constitute minimum essential coverage.—An employee shall not be taken into account under subsection (a) unless such employee’s eligibility for the CHOICE arrangement (determined without regard to the employee being enrolled) would cause the employee to be treated under section 36B(c)(2) as being eligible for minimum essential coverage consisting of an eligible employer-sponsored plan (as defined in section 5000A(f)(2)).
“(c) Definitions.—For purposes of this section—
“(1) CHOICE ARRANGEMENT.—The term ‘CHOICE arrangement’ means a custom health option and individual care expense arrangement (as defined in section 9815(b)(2)(B)).
“(2) CREDIT PERIOD.—The credit period with respect to an eligible employer is the first 2 one-year periods beginning with the month during which the employer first establishes a CHOICE arrangement on behalf of employees of the employer.
“(3) ELIGIBLE EMPLOYER.—The term ‘eligible employer’ means, with respect to any taxable year beginning in a calendar year, an employer who is not an applicable large employer for the calendar year under section 4980H.
“(d) Inflation adjustment.—
“(1) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 2026, the dollar amount in subsection (a) 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 by substituting ‘calendar year 2025’ for ‘calendar year 2016’ in subparagraph (A)(ii) thereof.
“(2) ROUNDING.—If any amount after adjustment under paragraph (1) is not a multiple of $10, such amount shall be rounded to the next lower multiple of $10.”.
(b) Credit made part of general business credit.—Section 38(b) is amended by striking “plus” at the end of paragraph (40), by striking the period at the end of paragraph (41) and inserting “, plus”, and by adding at the end the following new paragraph:
“(42) the CHOICE arrangement credit determined under section 45BB(a).”.
(c) Credit allowed against alternative minimum tax.—Section 38(c)(4)(B) is amended—
(1) by redesignating clauses (x), (xi), and (xii) as clauses (xi), (xii), and (xiii), respectively, and
(2) by inserting after clause (ix) the following new clause:
“(x) the credit determined under section 45BB,”.
(d) Clerical amendment.—The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:
“Sec. 45BB. Employer credit for CHOICE arrangement.”.
(e) Effective date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2025.
SEC. 110204. Individuals entitled to part A of Medicare by reason of age allowed to contribute to health savings accounts.
(a) In general.—Section 223(c)(1)(B) is amended by striking “and” at the end of clause (ii), by striking the period at the end of clause (iii) and inserting “, and”, and by adding at the end the following new clause:
“(iv) entitlement to hospital insurance benefits under part A of title XVIII of the Social Security Act by reason of section 226(a) of such Act.”.
(b) Treatment of health insurance purchased from account.—Section 223(d)(2)(C)(iv) is amended by inserting “and who is not an eligible individual” after “who has attained the age specified in section 1811 of the Social Security Act”.
(c) Coordination with penalty on distributions not used for qualified medical expenses.—Section 223(f)(4)(C) is amended by striking “Subparagraph (A)” and inserting “Except in the case of an eligible individual, subparagraph (A)”
(d) Conforming amendment.—Section 223(b)(7) is amended by inserting “(other than an entitlement to benefits described in subsection (c)(1)(B)(iv))” after “Social Security Act”.
(e) Effective date.—The amendments made by this section shall apply to months beginning after December 31, 2025.
SEC. 110205. Treatment of direct primary care service arrangements.
(a) In general.—Section 223(c)(1) is amended by adding at the end the following new subparagraph:
“(E) TREATMENT OF DIRECT PRIMARY CARE SERVICE ARRANGEMENTS.—
“(i) IN GENERAL.—A direct primary care service arrangement shall not be treated as a health plan for purposes of subparagraph (A)(ii).
“(ii) DIRECT PRIMARY CARE SERVICE ARRANGEMENT.—For purposes of this subparagraph—
“(I) IN GENERAL.—The term ‘direct primary care service arrangement’ means, with respect to any individual, an arrangement under which such individual is provided medical care (as defined in section 213(d)) consisting solely of primary care services provided by primary care practitioners (as defined in section 1833(x)(2)(A) of the Social Security Act, determined without regard to clause (ii) thereof), if the sole compensation for such care is a fixed periodic fee.
“(II) LIMITATION.—With respect to any individual for any month, such term shall not include any arrangement if the aggregate fees for all direct primary care service arrangements (determined without regard to this subclause) with respect to such individual for such month exceed $150 (twice such dollar amount in the case of an individual with any direct primary care service arrangement (as so determined) that covers more than one individual).
“(iii) CERTAIN SERVICES SPECIFICALLY EXCLUDED FROM TREATMENT AS PRIMARY CARE SERVICES.—For purposes of this subparagraph, the term ‘primary care services’ shall not include—
“(I) procedures that require the use of general anesthesia,
“(II) prescription drugs (other than vaccines), and
“(III) laboratory services not typically administered in an ambulatory primary care setting.
The Secretary, after consultation with the Secretary of Health and Human Services, shall issue regulations or other guidance regarding the application of this clause.”.
(b) Direct primary care service arrangement fees treated as medical expenses.—Section 223(d)(2)(C) is amended by striking “or” at the end of clause (iii), by striking the period at the end of clause (iv) and inserting “, or”, and by adding at the end the following new clause:
“(v) any direct primary care service arrangement.”.
(c) Inflation adjustment.—Section 223(g)(1) is amended—
(1) by inserting “, (c)(1)(E)(ii)(II),” after “(b)(2)” each place it appears, and
(2) in subparagraph (B), by striking “clause (ii)” in clause (i) and inserting “clauses (ii) and (iii)” , by striking “and” at the end of clause (i), by striking the period at the end of clause (ii) and inserting “, and”, and by inserting after clause (ii) the following new clause:
“(iii) in the case of the dollar amount in subsection (c)(1)(E)(ii)(II) for taxable years beginning in calendar years after 2026, ‘calendar year 2025’.”.”.
(d) Effective date.—The amendments made by this section shall apply to months beginning after December 31, 2025.
SEC. 110206. Allowance of bronze and catastrophic plans in connection with health savings accounts.
(a) In general.—Section 223(c)(2) is amended by adding at the end the following new subparagraph:
“(H) BRONZE AND CATASTROPHIC PLANS TREATED AS HIGH DEDUCTIBLE HEALTH PLANS.—The term ‘high deductible health plan’ shall include any plan—
“(i) available as individual coverage through an Exchange established under section 1311 or 1321 of the Patient Protection and Affordable Care Act, and
“(ii) described in subsection (d)(1)(A) or (e) of section 1302 of such Act.”.
(b) Effective date.—The amendment made by this section shall apply to months beginning after December 31, 2025.
SEC. 110207. On-site employee clinics.
(a) In general.—Section 223(c)(1), as amended by the preceding provisions of this Act, is amended by adding at the end the following new subparagraph:
“(F) SPECIAL RULE FOR QUALIFIED ITEMS AND SERVICES.—
“(i) IN GENERAL.—For purposes of subparagraph (A)(ii), an individual shall not be treated as covered under a health plan described in subclauses (I) and (II) of such subparagraph merely because the individual is eligible to receive, or receives, qualified items and services—
“(I) at a healthcare facility located at a facility owned or leased by the employer of the individual (or of the individual’s spouse), or
“(II) at a healthcare facility operated primarily for the benefit of employees of the employer of the individual (or of the individual’s spouse).
“(ii) QUALIFIED ITEMS AND SERVICES DEFINED.—For purposes of this subparagraph, the term ‘qualified items and services’ means the following:
“(I) Physical examination.
“(II) Immunizations, including injections of antigens provided by employees.
“(III) Drugs or biologicals other than a prescribed drug (as such term is defined in section 213(d)(3)).
“(IV) Treatment for injuries occurring in the course of employment.
“(V) Preventive care for chronic conditions (as defined in clause (iv)).
“(VI) Drug testing.
“(VII) Hearing or vision screenings and related services.
“(iii) AGGREGATION.—For purposes of clause (i), all persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as a single employer.
“(iv) PREVENTIVE CARE FOR CHRONIC CONDITIONS.—For purposes of this subparagraph, the term ‘preventive care for chronic conditions’ means any item or service specified in the Appendix of Internal Revenue Service Notice 2019–45 which is prescribed to treat an individual diagnosed with the associated chronic condition specified in such Appendix for the purpose of preventing the exacerbation of such chronic condition or the development of a secondary condition, including any amendment, addition, removal, or other modification made by the Secretary (pursuant to the authority granted to the Secretary under paragraph (2)(C)) to the items or services specified in such Appendix subsequent to the date of publication of such Notice.”.
(b) Effective date.—The amendments made by this section shall apply to months in taxable years beginning after December 31, 2025.
SEC. 110208. Certain amounts paid for physical activity, fitness, and exercise treated as amounts paid for medical care.
(a) In general.—Section 223(d)(2)(A) is amended by adding at the end the following: “For purposes of this subparagraph, amounts paid for qualified sports and fitness expenses shall be treated as paid for medical care.”.
(b) Qualified sports and fitness expenses.—Section 223(d)(2) is amended by adding at the end the following new subparagraph:
“(E) QUALIFIED SPORTS AND FITNESS EXPENSES.—For purposes of this paragraph—
“(i) IN GENERAL.—The term ‘qualified sports and fitness expenses’ means amounts paid exclusively for the sole purpose of participating in a physical activity including—
“(I) for membership at a fitness facility, or
“(II) for participation or instruction in physical exercise or physical activity.
“(ii) OVERALL DOLLAR LIMITATION.—
“(I) IN GENERAL.—The aggregate amount treated as qualified sports and fitness expenses with respect to any taxpayer for any taxable year shall not exceed $500 ($1,000 in the case of a joint return or a head of household (as defined in section 2(b))).
“(II) MONTHLY LIMIT.—The amount taken into account under subparagraph (A) as paid for participating in a physical activity during a month beginning during the taxable year shall not exceed an amount equal to 1/12 of the amount in effect with respect to the taxpayer for the taxable year under subclause (I).
“(iii) FITNESS FACILITY.—For purposes of clause (i)(I), the term ‘fitness facility’ means a facility—
“(I) which provides instruction in a program of physical exercise, offers facilities for the preservation, maintenance, encouragement, or development of physical fitness, or serves as the site of such a program of a State or local government,
“(II) which is not a private club owned and operated by its members,
“(III) which does not offer golf, hunting, sailing, or riding facilities,
“(IV) the health or fitness component of which is not incidental to its overall function and purpose, and
“(V) which is fully compliant with the State of jurisdiction and Federal anti-discrimination laws.
“(iv) TREATMENT OF PERSONAL TRAINERS, EXERCISE VIDEOS, ETC.—The term ‘qualified sports and fitness expenses’ shall not include any amount paid for—
“(I) videos, books, or similar materials,
“(II) remote or virtual instruction in a physical exercise or physical activity, unless such instruction is live, or
“(III) one-on-one personal training.
“(v) PROGRAMS WHICH INCLUDE COMPONENTS OTHER THAN PHYSICAL EXERCISE AND PHYSICAL ACTIVITY.—Rules similar to the rules of section 213(d)(6) shall apply in the case of any program that includes physical exercise or physical activity and also other components. For purposes of the preceding sentence, travel and accommodations shall be treated as a separate component.
“(vi) MEMBERSHIP, PARTICIPATION, AND INSTRUCTION MUST BE CONTINUING.—An amount shall not be treated as paid for the purpose of participating in a physical activity unless—
“(I) in the case of a membership at a fitness facility, such membership is for more than 1 day, and
“(II) in the case of participation or instruction in physical exercise or physical activity, the amount paid constitutes payment for more than 1 occasion of such participation or instruction.
“(vii) COST-OF-LIVING ADJUSTMENT.—In the case of any taxable year beginning in a calendar year after 2026, each dollar amount in clause (ii)(I) shall be increased by an amount equal to—
“(I) such dollar amount, multiplied by
“(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins by substituting ‘calendar year 2025’ for ‘calendar year 2016’ in subparagraph (A)(ii) thereof.
If any increase under the preceding sentence is not a multiple of $50, such increase shall be rounded to the nearest multiple of $50.”.
(c) Effective date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2025.
SEC. 110209. Allow both spouses to make catch-up contributions to the same health savings account.
(a) In general.—Section 223(b)(5) is amended to read as follows:
“(5) SPECIAL RULE FOR MARRIED INDIVIDUALS WITH FAMILY COVERAGE.—
“(A) IN GENERAL.—In the case of individuals who are married to each other, if both spouses are eligible individuals and either spouse has family coverage under a high deductible health plan as of the first day of any month—
“(i) the limitation under paragraph (1) shall be applied by not taking into account any other high deductible health plan coverage of either spouse (and if such spouses both have family coverage under separate high deductible health plans, only one such coverage shall be taken into account),
“(ii) such limitation (after application of clause (i)) shall be reduced by the aggregate amount paid to Archer MSAs of such spouses for the taxable year, and
“(iii) such limitation (after application of clauses (i) and (ii)) shall be divided equally between such spouses unless they agree on a different division.
“(B) TREATMENT OF ADDITIONAL CONTRIBUTION AMOUNTS.—If both spouses referred to in subparagraph (A) have attained age 55 before the close of the taxable year, the limitation referred to in subparagraph (A)(iii) which is subject to division between the spouses shall include the additional contribution amounts determined under paragraph (3) for both spouses. In any other case, any additional contribution amount determined under paragraph (3) shall not be taken into account under subparagraph (A)(iii) and shall not be subject to division between the spouses.”.
(b) Effective date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2025.
SEC. 110210. FSA AND HRA TERMINATIONS OR CONVERSIONS TO FUND HSAs.
(a) In general.—Section 106(e)(2) is amended to read as follows:
“(2) QUALIFIED HSA DISTRIBUTION.—For purposes of this subsection—
“(A) IN GENERAL.—The term ‘qualified HSA distribution’ means, with respect to any employee, a distribution from a health flexible spending arrangement or health reimbursement arrangement of such employee contributed directly to a health savings account of such employee if—
“(i) such distribution is made in connection with such employee establishing coverage under a high deductible health plan (as defined in section 223(c)(2)) if during the 4-year period preceding the date the employee so establishes coverage the employee was not covered under such a high deductible health plan, and
“(ii) such arrangement is described in section 223(c)(1)(B)(v) with respect to any portion of the plan year remaining after such distribution is made, if such employee remains enrolled in such arrangement.
“(B) DOLLAR LIMITATION.—The aggregate amount of distributions from health flexible spending arrangements and health reimbursement arrangements of any employee which may be treated as qualified HSA distributions in connection with an establishment of coverage described in subparagraph (A)(i) shall not exceed the dollar amount in effect under section 125(i)(1) (twice such amount in the case of coverage which is described in section 223(b)(2)(B)).”.
(b) Partial reduction of limitation on deductible HSA contributions.—Section 223(b)(4) is amended by striking “and” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting “, and”, and by inserting after subparagraph (C) the following new subparagraph:
“(D) so much of any qualified HSA distribution (as defined in section 106(e)(2)) made to a health savings account of such individual during the taxable year as does not exceed the aggregate increases in the balance of the arrangement from which such distribution is made which occur during the portion of the plan year which precedes such distribution (other than any balance carried over to such plan year and determined without regard to any decrease in such balance during such portion of the plan year).”.
(c) Conversion to hsa-compatible arrangement for remainder of plan year.—Section 223(c)(1)(B), as amended by this preceding provisions of this Act, is amended by striking “and” at the end of clause (iii), by striking the period at the end of clause (iv) and inserting “, and”, and by adding at the end the following new clause:
“(v) coverage under a health flexible spending arrangement or health reimbursement arrangement for the portion of the plan year after a qualified HSA distribution (as defined in section 106(e)(2) determined without regard to subparagraph (A)(ii) thereof) is made, if the terms of such arrangement which apply for such portion of the plan year are such that, if such terms applied for the entire plan year, then such arrangement would not be taken into account under subparagraph (A)(ii) of this paragraph for such plan year.”.
(d) Inclusion of qualified HSA distributions on w–2.—
(1) IN GENERAL.—Section 6051(a), as amended by the preceding provisions of this Act, is amended by striking “and” at the end of paragraph (19), by striking the period at the end of paragraph (20) and inserting “, and”, and by inserting after paragraph (20) the following new paragraph:
“(21) the amount of any qualified HSA distribution (as defined in section 106(e)(2)) with respect to such employee.”.
(2) CONFORMING AMENDMENT.—Section 6051(a)(12) is amended by inserting “(other than any qualified HSA distribution, as defined in section 106(e)(2))” before the comma at the end.
(e) Effective date.—The amendments made by this section shall apply to distributions made after December 31, 2025.
SEC. 110211. Special rule for certain medical expenses incurred before establishment of health savings account.
(a) In general.—Section 223(d)(2), as amended by the preceding provisions of this Act, is amended by adding at the end the following new subparagraph:
“(F) TREATMENT OF CERTAIN MEDICAL EXPENSES INCURRED BEFORE ESTABLISHMENT OF ACCOUNT.—If a health savings account is established during the 60-day period beginning on the date that coverage of the account beneficiary under a high deductible health plan begins, then, solely for purposes of determining whether an amount paid is used for a qualified medical expense, such account shall be treated as having been established on the date that such coverage begins.”.
(b) Effective date.—The amendment made by this section shall apply with respect to coverage beginning after December 31, 2025.
SEC. 110212. Contributions permitted if spouse has health flexible spending arrangement.
(a) Contributions permitted if spouse has a health flexible spending arrangement.—Section 223(c)(1)(B), as amended by this preceding provisions of this Act, is amended by striking “and” at the end of clause (iv), by striking the period at the end of clause (v) and inserting “, and”, and by adding at the end the following new clause:
“(vi) coverage under a health flexible spending arrangement of the spouse of the individual for any plan year of such arrangement if the aggregate reimbursements under such arrangement for such year do not exceed the aggregate expenses which would be eligible for reimbursement under such arrangement if such expenses were determined without regard to any expenses paid or incurred with respect to such individual.”.
(b) Effective date.—The amendment made by this section shall apply to plan years beginning after December 31, 2025.
SEC. 110213. Increase in health savings account contribution limitation for certain individuals.
(a) Increase.—
(1) IN GENERAL.—Section 223(b) is amended by adding at the end the following new paragraph:
“(9) INCREASE IN LIMITATION FOR CERTAIN TAXPAYERS.—
“(A) IN GENERAL.—The applicable limitation under subparagraphs (A) and (B) of paragraph (2) shall be increased by $4,300 and $8,550, respectively.
“(B) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME.—The amount of the increase under subparagraph (A) (determined without regard to this subparagraph) shall be reduced (but not below zero) by the amount which bears the same ratio to the amount of such increase (as so determined) as—
“(i) the excess (if any) of—
“(I) the taxpayer’s adjusted gross income for such taxable year, over
“(II) $75,000 ($150,000 in the case of a joint return, if the eligible individual has family coverage), bears to
“(ii) $25,000 ($50,000 in the case of a joint return, if the eligible individual has family coverage).
For purposes of the preceding sentence, adjusted gross income shall be determined in the same manner as under section 219(g)(3)(A), except determined without regard to any deduction allowed under this section.”.
(2) ONLY TO APPLY TO EMPLOYEE CONTRIBUTIONS.—Section 106(d)(1) is amended by inserting “and section 223(b)(9)” after “determined without regard to this subsection”.
(b) Inflation adjustment.—Section 223(g), as amended by the preceding provisions of this Act, is amended—
(1) by inserting “, (b)(9)(A), (b)(9)(B)(i)(II),” before “and (c)(2)(A)” each place it appears,
(2) by striking “clauses (ii) and (ii)” in paragraph (1)(B)(i) and inserting “clauses (ii), (iii), and (iv)”,
(3) by striking “and” at the end of paragraph (1)(B)(ii),
(4) by striking the period at the end of paragraph (1)(B)(iii) and inserting “, and”, and
(5) by inserting after paragraph (1)(B)(iii) the following new clause:
“(iv) in the case of the dollar amounts in subsections (b)(9)(A) and (b)(9)(B)(i)(II), ‘calendar year 2025’.”.
(c) Effective date.—
(1) SUBSECTION (a).—The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 2025.
(2) SUBSECTION (b).—The amendments made by subsection (b) shall apply to taxable years beginning after December 31, 2026.
SEC. 110214. Regulations.
The Secretary of the Treasury and the Secretary of Health and Human Services may each prescribe such rules and other guidance as may be necessary or appropriate to carry out the amendments made by this part.