Short title

This Act may be cited as the

Medical FSA Improvement Act of 2009

Addition of taxable distributions

(a)

Treatment of amounts expended for medical care

Section 105 of the Internal Revenue Code of 1986 (relating to amounts received under accident and health plans) is amended by inserting at the end the following new subsection:

(k)

Amounts paid under medical flexible spending arrangements

(1)

Application of subsection (b)

For purposes of subsection (b) and section 106, a plan shall not fail to be treated as flexible spending arrangement solely because such plan, in addition to reimbursing expenses incurred for medical care (as defined in subsection (b)) during the plan year, distributes for the plan year the lesser of— (A)all or a portion of the employee’s balance, or (B)$1,500. (2)

Limitation

Paragraph (1) shall apply only in the case that the balance under such arrangement for a plan year is distributed after the close of the plan year to which the balance relates and not later than the end of the 7th month following the close of such plan year. (3)

Tax treatment of distribution

Any distribution to which paragraph (1) applies shall be treated as remuneration of the employee for emploment for the taxable year in which it is distributed. (4)

Flexible spending arrangement

The term flexible spending arrangement means a benefit program within the meaning of section 106(c)(2) (relating to long-term care benefits). (5)

Termination

Paragraph (1) shall not apply to any distribution for a plan year beginning after December 31, 2011.

(b)

Additional deferred compensation exception

Paragraph (2) of section 125(d) of such Code (relating to deferred compensation under a cafeteria plan) is amended by inserting at the end the following new subparagraph:

(E)

Exception for certain flexible spending arrangements

Subparagraph (A) shall not apply to a flexible spending arrangement (within the meaning of section 106(c)(2)) as a result of amounts being distributed to the covered employee in accordance with section 105(k).

(c)

Conforming amendment

Section 409A(d)(1) of such Code is amended by striking and at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting , and, and by adding at the end the following:

(C)a flexible spending arrangement which is subject to section 105(k).

(d)

Effective date

The amendments made by this section shall apply to plan years beginning after December 31, 2008. (e)

Transition rules

In the case of plan years that begin before the date of the enactment of this Act, in implementing the amendments made by this section a flexible spending arrangement may allow an individual to make a new election or to revise an existing election under such arrangement so long as such new or revised election is made within 90 days after the date of the enactment of this Act.

Self-employed individuals

(a)

In general

Subsection (d) of section 125 of the Internal Revenue Code of 1986 (defining cafeteria plan) is amended by adding at the end the following new paragraph:

(3)

Employee To include self-employed

In the case of a medical flexible spending arrangement— (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 lesser of— (i)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, or (ii)$5,000.

(b)

Application to benefits which may be provided under cafeteria plan

(1)

Accident and health plans

Subsection (g) of section 105 of such Code is amended to read as follows:

(g)

Employee includes self-employed

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)

Contributions by employers to accident and health plans

(A)

In general

Section 106 of such Code is amended by adding after subsection (e) the following new subsection:

(f)

Employer To include self-employed

(1)

In general

For purposes of this section, in the case of a medical flexible spending account 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 lesser of— (A)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, or (B)$5,000. (3)

Tax treatment of distribution

Any distribution to which 105(k) applies shall be treated as self-employment income (as defined in section 1402(b)) of the employee for the taxable year in which it is distributed. (4)

Election

Paragraph (1) shall not apply for any taxable year if the employee elects to have paragraph (1) not apply for such taxable year.

(B)

Coordination with section 106(f)

Paragraph (2) of section 162(l) of such Code is amended by adding at the end the following new subparagraph:

(D)

Coordination with section 106(f)

No deduction shall be allowed under paragraph (1) for any amount with respect to which an election is in effect under section 106(f)(4).

(c)

Effective date

The amendments made by this section shall apply to plan years beginning after December 31, 2008. (d)

Transition rules

In the case of plan years that begin before the date of the enactment of this Act, in implementing the amendments made by this section a flexible spending arrangement may allow an individual to make an election under such arrangement so long as such election is made within 90 days after the date of the enactment of this Act.