[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 723 Introduced in Senate (IS)]







109th CONGRESS
  1st Session
                                 S. 723

To amend the Internal Revenue Code of 1986 to allow small businesses to 
 set up simple cafeteria plans to provide nontaxable employee benefits 
 to their employees, to make changes in the requirements for cafeteria 
  plans, flexible spending accounts, and benefits provided under such 
               plans or accounts, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             April 6, 2005

  Ms. Snowe (for herself, Mr. Bond, and Mr. Bingaman) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL


 
To amend the Internal Revenue Code of 1986 to allow small businesses to 
 set up simple cafeteria plans to provide nontaxable employee benefits 
 to their employees, to make changes in the requirements for cafeteria 
  plans, flexible spending accounts, and benefits provided under such 
               plans or accounts, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``SIMPLE Cafeteria 
Plan Act of 2005''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. ESTABLISHMENT OF SIMPLE CAFETERIA PLANS FOR SMALL BUSINESSES.

    (a) In General.--Section 125 (relating to cafeteria plans) is 
amended by redesignating subsections (h) and (i) as subsections (i) and 
(j), respectively, and by inserting after subsection (g) the following 
new subsection:
    ``(h) Simple Cafeteria Plans for Small Businesses.--
            ``(1) In general.--An eligible employer maintaining a 
        simple cafeteria plan with respect to which the requirements of 
        this subsection are met for any year shall be treated as 
        meeting any applicable nondiscrimination requirement with 
        respect to benefits provided under the plan during such year.
            ``(2) Simple cafeteria plan.--For purposes of this 
        subsection, the term `simple cafeteria plan' means a cafeteria 
        plan--
                    ``(A) which is established and maintained by an 
                eligible employer, and
                    ``(B) with respect to which the contribution 
                requirements of paragraph (3), and the eligibility and 
                participation requirements of paragraph (4), are met.
            ``(3) Contributions requirements.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if, under the plan--
                            ``(i) the employer makes matching 
                        contributions on behalf of each employee who is 
                        eligible to participate in the plan and who is 
                        not a highly compensated or key employee in an 
                        amount equal to the elective plan contributions 
                        of the employee to the plan to the extent the 
                        employee's elective plan contributions do not 
                        exceed 3 percent of the employee's 
                        compensation, or
                            ``(ii) the employer is required, without 
                        regard to whether an employee makes any 
                        elective plan contribution, to make a 
                        contribution to the plan on behalf of each 
                        employee who is not a highly compensated or key 
                        employee and who is eligible to participate in 
                        the plan in an amount equal to at least 2 
                        percent of the employee's compensation.
                    ``(B) Matching contributions on behalf of highly 
                compensated and key employees.--The requirements of 
                subparagraph (A)(i) shall not be treated as met if, 
                under the plan, the rate of matching contribution with 
                respect to any elective plan contribution of a highly 
                compensated or key employee at any rate of contribution 
                is greater than that with respect to an employee who is 
                not a highly compensated or key employee.
                    ``(C) Special rules.--
                            ``(i) Time for making contributions.--An 
                        employer shall not be treated as failing to 
                        meet the requirements of this paragraph with 
                        respect to any elective plan contributions of 
                        any compensation, or employer contributions 
                        required under this paragraph with respect to 
                        any compensation, if such contributions are 
                        made no later than the 15th day of the month 
                        following the last day of the calendar quarter 
                        which includes the date of payment of the 
                        compensation.
                            ``(ii) Form of contributions.--Employer 
                        contributions required under this paragraph may 
                        be made either to the plan to provide benefits 
                        offered under the plan or to any person as 
                        payment for providing benefits offered under 
                        the plan.
                            ``(iii) Additional contributions.--Subject 
                        to subparagraph (B), nothing in this paragraph 
                        shall be treated as prohibiting an employer 
                        from making contributions to the plan in 
                        addition to contributions required under 
                        subparagraph (A).
                    ``(D) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Elective plan contribution.--The term 
                        `elective plan contribution' means any amount 
                        which is contributed at the election of the 
                        employee and which is not includible in gross 
                        income by reason of this section.
                            ``(ii) Highly compensated employee.--The 
                        term `highly compensated employee' has the 
                        meaning given such term by section 414(q).
                            ``(iii) Key employee.--The term `key 
                        employee' has the meaning given such term by 
                        section 416(i).
            ``(4) Minimum eligibility and participation requirements.--
                    ``(A) In general.--The requirements of this 
                paragraph shall be treated as met with respect to any 
                year if, under the plan--
                            ``(i) all employees who had at least 1,000 
                        hours of service for the preceding plan year 
                        are eligible to participate, and
                            ``(ii) each employee eligible to 
                        participate in the plan may, subject to terms 
                        and conditions applicable to all participants, 
                        elect any benefit available under the plan.
                    ``(B) Certain employees may be excluded.--For 
                purposes of subparagraph (A)(i), an employer may elect 
                to exclude under the plan employees--
                            ``(i) who have less than 1 year of service 
                        with the employer as of any day during the plan 
                        year,
                            ``(ii) who have not attained the age of 21 
                        before the close of a plan year,
                            ``(iii) who are covered under an agreement 
                        which the Secretary of Labor finds to be a 
                        collective bargaining agreement if there is 
                        evidence that the benefits covered under the 
                        cafeteria plan were the subject of good faith 
                        bargaining between employee representatives and 
                        the employer, or
                            ``(iv) who are described in section 
                        410(b)(3)(C) (relating to nonresident aliens 
                        working outside the United States).
                A plan may provide a shorter period of service or 
                younger age for purposes of clause (i) or (ii).
            ``(5) Eligible employer.--For purposes of this subsection--
                    ``(A) In general.--The term `eligible employer' 
                means, with respect to any year, any employer if such 
                employer employed an average of 100 or fewer employees 
                on business days during either of the 2 preceding 
                years. For purposes of this subparagraph, a year may 
                only be taken into account if the employer was in 
                existence throughout the year.
                    ``(B) Employers not in existence during preceding 
                year.--If an employer was not in existence throughout 
                the preceding year, the determination under 
                subparagraph (A) shall be based on the average number 
                of employees that it is reasonably expected such 
                employer will employ on business days in the current 
                year.
                    ``(C) Growing employers retain treatment as small 
                employer.--If--
                            ``(i) an employer was an eligible employer 
                        for any year (a `qualified year'), and
                            ``(ii) such employer establishes a simple 
                        cafeteria plan for its employees for such year, 
                        then, notwithstanding the fact the employer 
                        fails to meet the requirements of subparagraph 
                        (A) for any subsequent year, such employer 
                        shall be treated as an eligible employer for 
                        such subsequent year with respect to employees 
                        (whether or not employees during a qualified 
                        year) of any trade or business which was 
                        covered by the plan during any qualified year. 
                        This subparagraph shall cease to apply if the 
                        employer employs an average of 200 more 
                        employees on business days during any year 
                        preceding any such subsequent year.
                    ``(D) Special rules.--The rules of section 
                220(c)(4)(D) shall apply for purposes of this 
                paragraph.
            ``(6) Applicable nondiscrimination requirement.--For 
        purposes of this subsection, the term `applicable 
        nondiscrimination requirement' means any requirement under 
        subsection (b) of this section, section 79(d), section 105(h), 
        or paragraph (2), (3), (4), or (8) of section 129(d).
            ``(7) Compensation.--The term `compensation' has the 
        meaning given such term by section 414(s).''
    (b) Effective Date.--The amendments made by this section shall 
apply to years beginning after December 31, 2004.

SEC. 3. MODIFICATIONS OF RULES APPLICABLE TO CAFETERIA PLANS.

    (a) Application to Self-Employed Individuals.--
            (1) In general.--Section 125(d) (defining cafeteria plan) 
        is amended by adding at the end the following new paragraph:
            ``(3) Employee to include self-employed.--
                    ``(A) In general.--The term `employee' includes an 
                individual who is an employee within the meaning of 
                section 401(c)(1) (relating to self-employed 
                individuals).
                    ``(B) Limitation.--The amount which may be excluded 
                under subsection (a) with respect to a participant in a 
                cafeteria plan by reason of being an employee under 
                subparagraph (A) shall not exceed the employee's earned 
                income (within the meaning of section 401(c)) derived 
                from the trade or business with respect to which the 
                cafeteria plan is established.''
            (2) Application to benefits which may be provided under 
        cafeteria plan.--
                    (A) Group-term life insurance.--Section 79 
                (relating to group-term life insurance provided to 
                employees) is amended by adding at the end the 
                following new subsection:
    ``(f) Employee Includes Self-Employed.--
            ``(1) In general.--For purposes of this section, the term 
        `employee' includes an individual who is an employee within the 
        meaning of section 401(c)(1) (relating to self-employed 
        individuals).
            ``(2) Limitation.--The amount which may be excluded under 
        the exceptions contained in subsection (a) or (b) with respect 
        to an individual treated as an employee by reason of paragraph 
        (1) shall not exceed the employee's earned income (within the 
        meaning of section 401(c)) derived from the trade or business 
        with respect to which the individual is so treated.''
                    (B) Accident and health plans.--Section 105(g) is 
                amended to read as follows:
    ``(g) Employee Includes Self-Employed.--
            ``(1) In general.--For purposes of this section, the term 
        `employee' includes an individual who is an employee within the 
        meaning of section 401(c)(1) (relating to self-employed 
        individuals).
            ``(2) Limitation.--The amount which may be excluded under 
        this section by reason of subsection (b) or (c) with respect to 
        an individual treated as an employee by reason of paragraph (1) 
        shall not exceed the employee's earned income (within the 
        meaning of section 401(c)) derived from the trade or business 
        with respect to which the accident or health insurance was 
        established.''
                    (C) Contributions by employers to accident and 
                health plans.--
                            (i) In general.--Section 106, as amended by 
                        subsection (b), is amended by adding after 
                        subsection (b) the following new subsection:
    ``(c) Employer to Include Self-Employed.--
            ``(1) In general.--For purposes of this section, the term 
        `employee' includes an individual who is an employee within the 
        meaning of section 401(c)(1) (relating to self-employed 
        individuals).
            ``(2) Limitation.--The amount which may be excluded under 
        subsection (a) with respect to an individual treated as an 
        employee by reason of paragraph (1) shall not exceed the 
        employee's earned income (within the meaning of section 401(c)) 
        derived from the trade or business with respect to which the 
        accident or health insurance was established.''
                    (ii) Clarification of limitations on other 
                coverage.--The first sentence of section 162(l)(2)(B) 
                is amended to read as follows: ``Paragraph (1) shall 
                not apply to any taxpayer for any calendar month for 
                which the taxpayer participates in any subsidized 
                health plan maintained by any employer (other than an 
                employer described in section 401(c)(4)) of the 
                taxpayer or the spouse of the taxpayer.
    (b) Long-Term Care Insurance Permitted to Be Offered Under 
Cafeteria Plans and Flexible Spending Arrangements.--
            (1) Cafeteria plans.--The last sentence of section 125(f) 
        (defining qualified benefits) is amended to read as follows: 
        ``Such term shall include the payment of premiums for any 
        qualified long-term care insurance contract (as defined in 
        section 7702B) to the extent the amount of such payment does 
        not exceed the eligible long-term care premiums (as defined in 
        section 213(d)(10)) for such contract''.
            (2) Flexible spending arrangements.--Section 106 (relating 
        to contributions by employer to accident and health plans) is 
        amended by striking subsection (c).
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 4. MODIFICATION OF RULES APPLICABLE TO FLEXIBLE SPENDING 
              ARRANGEMENTS.

    (a) In General.--Section 125, as amended by section 2, is amended 
by redesignating subsections (i) and (j) as subsections (j) and (k), 
respectively, and by inserting after subsection (h) the following new 
subsection:
    ``(i) Special Rules Applicable to Flexible Spending Arrangements.--
            ``(1) In general.--For purposes of this title, a plan or 
        other arrangement shall not fail to be treated as a flexible 
        spending or similar arrangement solely because under the plan 
        or arrangement--
                    ``(A) the amount of the reimbursement for covered 
                expenses at any time may not exceed the balance in the 
                participant's account for the covered expenses as of 
                such time,
                    ``(B) except as provided in paragraph (4)(A)(ii), a 
                participant may elect at any time specified by the plan 
                or arrangement to make or modify any election regarding 
                the covered benefits, or the level of covered benefits, 
                of the participant under the plan, and
                    ``(C) a participant is permitted access to any 
                unused balance in the participant's accounts under such 
                plan or arrangement in the manner provided under 
                paragraph (2) or (3).
            ``(2) Carryovers and rollovers of unused benefits in health 
        and dependent care arrangements.--
                    ``(A) In general.--A plan or arrangement may permit 
                a participant in a health flexible spending arrangement 
                or dependent care flexible spending arrangement to 
                elect--
                            ``(i) to carry forward any aggregate unused 
                        balances in the participant's accounts under 
                        such arrangement as of the close of any year to 
                        the succeeding year, or
                            ``(ii) to have such balance transferred to 
                        a plan described in subparagraph (E).
                Such carryforward or transfer shall be treated as 
                having occurred within 30 days of the close of the 
                year.
                    ``(B) Dollar limit on carryforwards.--
                            ``(i) In general.--The amount which a 
                        participant may elect to carry forward under 
                        subparagraph (A)(i) from any year shall not 
                        exceed $500. For purposes of this paragraph, 
                        all plans and arrangements maintained by an 
                        employer or any related person shall be treated 
                        as 1 plan.
                            ``(ii) Cost-of-living adjustment.--In the 
                        case of any taxable year beginning in a 
                        calendar year after 2005, the $500 amount under 
                        clause (i) shall be increased by an amount 
                        equal to--
                                    ``(I) $500, multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for such calendar year, 
                                determined by substituting `2004' for 
                                `1992' in subparagraph (B) thereof.
                        If any dollar amount as increased under this 
                        clause is not a multiple of $100, such amount 
                        shall be rounded to the next lowest multiple of 
                        $100.
                    ``(C) Exclusion from gross income.--No amount shall 
                be required to be included in gross income under this 
                chapter by reason of any carryforward or transfer under 
                this paragraph.
                    ``(D) Coordination with limits.--
                            ``(i) Carryforwards.--The maximum amount 
                        which may be contributed to a health flexible 
                        spending arrangement or dependent care flexible 
                        spending arrangement for any year to which an 
                        unused amount is carried under this paragraph 
                        shall be reduced by such amount.
                            ``(ii) Rollovers.--Any amount transferred 
                        under subparagraph (A)(ii) shall be treated as 
                        an eligible rollover under section 219, 
                        223(f)(5), 401(k), 403(b), or 457, whichever is 
                        applicable, except that--
                                    ``(I) the amount of the 
                                contributions which a participant may 
                                make to the plan under any such section 
                                for the taxable year including the 
                                transfer shall be reduced by the amount 
                                transferred, and
                                    ``(II) in the case of a transfer to 
                                a plan described in clause (ii) or 
                                (iii) of subparagraph (E), the 
                                transferred amounts shall be treated as 
                                elective deferrals for such taxable 
                                year.
                    ``(E) Plans.--A plan is described in this 
                subparagraph if it is--
                            ``(i) an individual retirement plan,
                            ``(ii) a qualified cash or deferred 
                        arrangement described in section 401(k),
                            ``(iii) a plan under which amounts are 
                        contributed by an individual's employer for an 
                        annuity contract described in section 403(b),
                            ``(iv) an eligible deferred compensation 
                        plan described in section 457, or
                            ``(v) a health savings account described in 
                        section 223.
            ``(3) Distribution upon termination.--
                    ``(A) In general.--A plan or arrangement may permit 
                a participant (or any designated heir of the 
                participant) to receive a cash payment equal to the 
                aggregate unused account balances in the plan or 
                arrangement as of the date the individual is separated 
                (including by death or disability) from employment with 
                the employer maintaining the plan or arrangement.
                    ``(B) Inclusion in income.--Any payment under 
                subparagraph (A) shall be includible in gross income 
                for the taxable year in which such payment is 
                distributed to the employee.
            ``(4) Terms relating to flexible spending arrangements.--
                    ``(A) Flexible spending arrangements.--
                            ``(i) In general.--For purposes of this 
                        subsection, a flexible spending arrangement is 
                        a benefit program which provides employees with 
                        coverage under which specified incurred 
                        expenses may be reimbursed (subject to 
                        reimbursement maximums and other reasonable 
                        conditions).
                            ``(ii) Elections required.--A plan or 
                        arrangement shall not be treated as a flexible 
                        spending arrangement unless a participant may 
                        at least 4 times during any year make or modify 
                        any election regarding covered benefits or the 
                        level of covered benefits.
                    ``(B) Health and dependent care arrangements.--The 
                terms `health flexible spending arrangement' and 
                `dependent care flexible spending arrangement' means 
                any flexible spending arrangement (or portion thereof) 
                which provides payments for expenses incurred for 
                medical care (as defined in section 213(d)) or 
                dependent care (within the meaning of section 129), 
                respectively.''
    (b) Conforming Amendment.--
            (1) The heading for section 125 is amended by inserting 
        ``and flexible spending arrangements'' after ``plans''.
            (2) The item relating to section 125 in the table of 
        sections for part III of subchapter B of chapter 1 is amended 
        by inserting ``and flexible spending arrangements'' after 
        ``plans''.
    (c) Effective Date.--The amendments made by this section shall 
apply to years beginning after December 31, 2004.

SEC. 5. RULES RELATING TO EMPLOYER-PROVIDED HEALTH AND DEPENDENT CARE 
              BENEFITS.

    (a) Health Benefits.--Section 106, as amended by section 3, is 
amended by adding at the end the following new subsection:
    ``(e) Limitation on Contributions to Health Flexible Spending 
Arrangements.--
            ``(1) In general.--Gross income of an employee for any 
        taxable year shall include employer-provided coverage provided 
        through 1 or more health flexible spending arrangements (within 
        the meaning of section 125(i)) to the extent that the amount 
        otherwise excludable under subsection (a) with regard to such 
        coverage exceeds the applicable dollar limit for the taxable 
        year.
            ``(2) Applicable dollar limit.--For purposes of this 
        subsection--
                    ``(A) In general.--The applicable dollar limit for 
                any taxable year is an amount equal to the sum of--
                            ``(i) $7,500, plus
                            ``(ii) if the arrangement provides coverage 
                        for 1 or more individuals in addition to the 
                        employee, an amount equal to one-third of the 
                        amount in effect under clause (i) (after 
                        adjustment under subparagraph (B)).
                    ``(B) Cost-of-living adjustment.--In the case of 
                taxable years beginning in any calendar year after 
                2005, the $7,500 amount under subparagraph (A) shall be 
                increased by an amount equal to--
                            ``(i) $7,500, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year, determined by substituting 
                        `2004' for `1992' in subparagraph (B) thereof.
                If any dollar amount as increased under this 
                subparagraph is not a multiple of $100, such dollar 
                amount shall be rounded to the next lowest multiple of 
                $100.''
    (b) Dependent Care.--
            (1) Exclusion limit.--
                    (A) In general.--Section 129(a)(2) (relating to 
                limitation on exclusion) is amended--
                            (i) by striking ``$5,000'' and inserting 
                        ``the applicable dollar limit'', and
                            (ii) by striking ``$2,500'' and inserting 
                        ``one-half of such limit''.
                    (B) Applicable dollar limit.--Section 129(a) is 
                amended by adding at the end the following new 
                paragraph:
            ``(3) Applicable dollar limit.--For purposes of this 
        subsection--
                    ``(A) In general.--The applicable dollar limit is 
                $5,000 ($10,000 if dependent care assistance is 
                provided under the program to 2 or more qualifying 
                individuals of the employee).
                    ``(B) Cost-of-living adjustments.--
                            ``(i) $5,000 amount.--In the case of 
                        taxable years beginning after 2005, the $5,000 
                        amount under subparagraph (A) shall be 
                        increased by an amount equal to--
                                    ``(I) $5,000, multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for the calendar year in which 
                                the taxable year begins, determined by 
                                substituting `2004' for `1992' in 
                                subparagraph (B) thereof.
                        If any dollar amount as increased under this 
                        clause is not a multiple of $100, such dollar 
                        amount shall be rounded to the next lowest 
                        multiple of $100.
                            ``(ii) $10,000 amount.--The $10,000 amount 
                        under subparagraph (A) for taxable years 
                        beginning after 2005 shall be increased to an 
                        amount equal to twice the amount the $5,000 
                        amount is increased to under clause (i).''
            (2) Average benefits test.--
                    (A) In general.--Section 129(d)(8)(A) (relating to 
                benefits) is amended--
                            (i) by striking ``55 percent'' and 
                        inserting ``60 percent'', and
                            (ii) by striking ``highly compensated 
                        employees'' the second place it appears and 
                        inserting ``employees receiving benefits''.
                    (B) Salary reduction agreements.--Section 
                129(d)(8)(B) (relating to salary reduction agreements) 
                is amended--
                            (i) by striking ``$25,000'' and inserting 
                        ``$30,000'', and
                            (ii) by adding at the end the following: 
                        ``In the case of years beginning after 2005, 
                        the $30,000 amount in the first sentence shall 
                        be adjusted at the same time, and in the same 
                        manner, as the applicable dollar amount is 
                        adjusted under subsection (a)(3)(B).''
            (3) Principal shareholders or owners.--Section 129(d)(4) 
        (relating to principal shareholders and owners) is amended by 
        adding at the end the following: ``In the case of any failure 
        to meet the requirements of this paragraph for any year, 
        amounts shall only be required by reason of the failure to be 
        included in gross income of the shareholders or owners who are 
        members of the class described in the preceding sentence.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.
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