(1)__Six thousand dollars reduced by the total amount of social security benefits and railroad retirement benefits paid by the United States, but not less than $0; or

(2)__The aggregate of benefits received under employee retirement plans and included in federal adjusted gross income.__For purposes of this paragraph, "employee retirement plan" means a state, federal or military retirement plan or any other retirement benefit plan established and maintained by an employer for the benefit of its employees under Section 401(a), Section 403 or Section 457(b) of the Code.__"Employee retirement plan" does not include an individual retirement account under Section 408 of the Code, a Roth IRA under Section 408A of the Code, a rollover individual retirement account, a simplified employee pension under Section 408(k) of the Code or an ineligible deferred compensation plan under Section 457(f) of the Code;

Sec. 6. 36 MRSA §5122, sub-§2, ¶¶N and O are enacted to read:

N.__Interest or dividends on obligations or securities of this State and its political subdivisions and authorities to the extent included in federal adjusted gross income; and

O. Contributions or deposits to an individual medical savings account established under chapter 914 subject to the following limitations.

(1)__The taxpayer may subtract:

(a)__The amount of contributions made by the taxpayer's employer during the taxable year to the taxpayer's individual medical savings account to the extent that the employer contributions are included in the taxpayer's federal adjusted gross income; and

(b)__The amount deposited by the taxpayer in the account during the taxable year.

(2)__The taxpayer's employer may subtract the amount of contributions made by the employer to an individual medical savings account established on the taxpayer's

behalf to the extent that the contributions are not deductible under the Code.

Sec. 7. 36 MRSA §5164, sub-§1, as amended by PL 1999, c. 708, §38, is further amended to read:

1. Fiduciary adjustment defined. The fiduciary adjustment is the net amount of the modifications described in section 5122, including subsection 3 if the estate or trust is a beneficiary of another estate or trust, which relates to items of income or deduction of an estate or trust. Income taxes imposed by this State or any other taxing jurisdiction and interest or expenses incurred in the production of income exempt from tax under this Part deducted in arriving at federal taxable income must be added back to the fiduciary adjustment. Interest or expenses incurred in the production of income taxable under this Part but exempt from federal income tax must be subtracted from the fiduciary adjustment.

Interest income earned on a trust that is established as an individual medical savings account pursuant to chapter 914 is not included as income if the interest income is received on obligations of a state, territory or possession of the United States or a political subdivision of a state, territory or possession that is located outside of this State.__Interest earned by a trust that is established as an individual medical savings account may be subtracted from the adjusted gross income to the extent that the income is included in the trust's Maine gross income during the taxable year.

Sec. 8. 36 MRSA §5200-A, sub-§2, ¶J, as amended by PL 1999, c. 708, §40, is further amended to read:

J. An amount equal to an income tax refund to the taxpayer by this State or another state of the United States that is included in that taxpayer's federal taxable income for the taxable year under the Code, but only to the extent that:

(1) Maine net income is not reduced below zero; and

(2) The amount to be refunded from this State or another state of the United States has not been previously used as a modification pursuant to this subsection.

If this modification amount results in Maine net income that is less than zero for the taxable year, the negative modification amount may be carried back or forward in the same manner as a net operating loss deduction carry-back or carry-forward to a taxable year that is within the allowable

federal period for a carry-back or carry-forward, subject to the above limitations; and

Sec. 9. 36 MRSA §5200-A, sub-§2, ¶K, as enacted by PL 1999, c. 708, §41, is amended to read:

K. Interest or dividends on obligations or securities of this State and its political subdivisions and authorities to the extent included in federal taxable income.; and

Sec. 10. 36 MRSA §5200-A, sub-§2, ¶L is enacted to read:

L.__The amount of contributions made by the taxpayer during the taxable year to individual medical savings accounts established on behalf of the taxpayer's employees pursuant to chapter 914 to the extent that the contributions are not deductible under the Code.

Sec. 11. 36 MRSA c. 914 is enacted to read:

CHAPTER 914

INDIVIDUAL MEDICAL SAVINGS ACCOUNT

§6601. Short title

This chapter may be known and cited as the "Individual Medical Savings Account Act."

§6602.__Definitions

As used in this chapter, unless the context otherwise indicates, the following terms have the following meanings.

1. Account administrator.__"Account administrator" means any of the following entities:

A.__A financial institution authorized to do business in this State as defined in Title 9-B, section 131, subsection 17-A;

B.__An insurance company authorized to do business in this State pursuant to Title 24-A;

C.__A nonprofit hospital or medical service organization authorized to do business in this State pursuant to Title 24; or

D.__An employer, if the employer has a self-insured health plan that meets the requirements of the federal Employee

Retirement Income Security Act of 1974, 29 United States Code, Sections 101 to 1461, as amended.

2.__Account holder.__"Account holder" means an individual on whose behalf an individual medical savings account is established.

3. Eligible medical expenses.__"Eligible medical expenses" means expenses paid by or on behalf of an account holder for medical care that are described in the Code, Section 213(d). "Eligible medical expenses" includes health insurance premiums and deductibles.

4.__Household.__"Household" means the taxpayer, the taxpayer's spouse and any member of the taxpayer's household for whom the taxpayer is entitled to claim an exemption as a dependent under Part 8.

5.__Individual medical savings account.__"Individual medical savings account" or "account" means a trust created or organized to pay eligible medical expenses.

§6603.__Establishment and procedures

Individual medical savings accounts may be established subject to the following procedures.

1.__Health insurance coverage.__Before establishing an individual medical savings account, the prospective account holder must obtain or have health insurance coverage.

2. Account establishment.__A resident may establish an individual medical savings account for taxable years beginning after December 31, 2001.__The account must be established as a trust under the laws of this State and must be placed with an account administrator.__At the time of establishment, the account administrator shall notify the account holder of potential federal income tax liability that may be associated with the account.

3.__Payment of eligible medical expenses.__The account administrator may use the funds in an account solely to pay eligible medical expenses of the account holder and members of the account holder's household that are not otherwise covered under the account holder's existing medical coverage. Funds held in an account may not be used to cover medical expenses of the account holder or members of the account holder's household who are otherwise covered, including, but not limited to, medical expenses covered pursuant to an automobile insurance policy, a workers' compensation insurance policy or a self-insured plan.__ If the account holder submits appropriate documentation to the

account administrator, the account administrator may reimburse the account holder from account funds for eligible medical expenses paid directly by the account holder during the taxable year.

4.__Withdrawals for other purposes.__The account holder may withdraw funds from the account for purposes other than those expenses allowed under subsection 3 on the last business day of the calendar year without incurring a withdrawal penalty.__If an account holder withdraws funds at any other time, other than for those purposes allowed under subsection 3, the account holder must pay a penalty equal to 10% of the amount withdrawn.__The penalty must be paid to the Bureau of Revenue Services at the time the account holder files an income tax return under this Title for the taxable year in which the funds were withdrawn.__ The State Tax Assessor shall credit all penalties received to the General Fund.

5.__Employer accounts.__Upon agreement between an employer and an employee, an employer may:

A.__Contribute to the employee's individual medical savings account;

B.__Make or continue to make contributions to the employee's medical coverage; or

C.__Contribute to both the employee's individual medical savings account and the employee's medical coverage.

6.__No limit.__In each taxable year, there is no limit to the total deposits that may be made to an account by or on behalf of an account holder.

7.__Death of account holder.__Upon the death of an account holder, the account administrator shall distribute the principal and accumulated interest of the individual medical savings account to the estate of the account holder.

8.__Tax consequences. Any amount deposited into an account established under this chapter may be subtracted from taxable income of the account holder during the same tax year.__Funds withdrawn pursuant to subsection 4 must be considered income to the account holder for the purpose of computing adjusted gross income.

SUMMARY

This bill allows residents of the State to establish medical savings accounts for payment of eligible medical expenses, including the payment of health insurance premiums and deductibles. Contributions to, interest earned on and qualified withdrawals from medical savings accounts are exempt from Maine state income tax.