[Congressional Record Volume 151, Number 38 (Wednesday, April 6, 2005)]
[Senate]
[Pages S3290-S3294]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Ms. SNOWE (for herself, Mr. Bond, and Mr. Bingaman):
S. 723. 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;
to the Committee on Finance.
Ms. SNOWE. Mr. President, I rise today to introduce the SIMPLE
Cafeteria Plan Act of 2005'' to increase the access to quality,
affordable health care for millions of small business owners and their
employees. I am pleased that my good friend from Missouri, Senator
Bond, as well as my good friend Senator Bingaman from New Mexico have
agreed to co-sponsor this critical piece of legislation.
Regrettably, our Nation's healthcare system is in the midst of a
crisis. Each year, more and more Americans are unable to purchase
health insurance, and there are no signs that things are improving. As
evidence, the United States Census Bureau estimates that nearly 47
million people did not have health insurance coverage for all of 2002.
Sadly, this number rose from 41.2 million uninsured persons in 2001--a
14.6 percent increase.
As if these numbers on a national scale are not alarming enough, the
results are even more troubling when we look specifically at the small
business sector of our economy. Analysis conducted by the Employee
Benefit Research Institute, a nonpartisan group dedicated to ensuring
that all workers have access to affordable health care, suggests that
the highest rates of uninsured occur among either self-employed workers
or workers whose employer employees fewer than 25 persons. When
compared to workers in firms that employ 1,000 or more employees, where
just 12.6 percent of those workers do not have health insurance, it
becomes clear that the majority of uninsured Americans work for small
enterprises. Clearly, these numbers suggest that there is a direct
correlation among those persons who do not have health insurance and
the size of their employer.
The question, then, is why are our Nation's small businesses, which
are our country's job creators and the true engine of our national
economy, so disadvantaged when it comes to purchasing health insurance.
The main reason that small business owners are not able to offer
their employees health insurance is because many small business owners
are able to pay only a portion of their employees' health insurance
premiums or, even worse, cannot afford to provide any health insurance
or other employee benefits at all. As a result, many small business
workers must acquire health insurance from the private sector rather
than the work place--an unfair, and far more expensive alternative.
Clearly, we have a problem on our hands. While we can debate among
ourselves why this crisis exists and how we ended up here, what is not
open for debate is that we need to start identifying ways to fix the
system because it is simply unconscionable to do nothing while more and
more Americans find themselves without health care.
As you know, I re-introduced a bill earlier this year that will go a
long ways towards improving the situation by creating Associated Health
Plans for small businesses. In general, this bill would permit small
businesses throughout the country to band together for purposes of
obtaining an insurance quote from an insurance company. By pooling
these businesses together, they would pay lower premiums because of the
increased risk pool.
Again, this bill would increase the number of Americans that would be
able to afford health insurance because their insurance premiums would
be based on a more reasonable number. The bill I am introducing today
builds upon this and goes a step further by putting more small business
owners and their employees on a level playing field when compared to
workers of a larger company.
Specifically, many large companies and even the Federal government
enable their employees to purchase health insurance and other qualified
benefits with taxfree dollars. Larger companies are able to do this by
qualifying for certain employee benefit delivery mechanisms under the
tax code.
One such delivery mechanism is a cafeteria plan. As the name
suggests, cafeteria plans are programs whereby employers offer their
employees the opportunity to purchase certain qualified benefits of
their choosing. The key here is that the employer provides the
opportunity for the employee to purchase the benefit, and the employee
is then free to chose whether to participate and which benefits to buy.
Under current law, qualified benefits include health insurance,
dependent-care reimbursement, and life and disability insurance.
Typically, employer contributions, employee contributions, or a
combination of the two fund these plans.
Cafeteria plans offer valuable benefits to employees and are popular
for many reasons. Specifically, they offer employees great flexibility
in selecting their desired benefits while enabling them to disregard
those benefits that do not fit their particular needs. Participating
employees are also able to exclude any wages that they contribute to a
cafeteria plan from their Federal taxable income, Social Security, and
Medicare, which means they are using more valuable pre-tax dollars to
buy these benefits. Moreover, the employees are usually purchasing
these benefits at a lower cost because employers are oftentimes able to
obtain a reduced price for the benefits through a group rate after they
establish a cafeteria plan.
Cafeteria plans also provide employers with valuable benefits, most
notably as a recruiting tool. It certainly stands to reason that if
more small business owners are able to offer their employees the chance
to enjoy a variety of employee benefits, these owners
[[Page S3291]]
then will be more likely to attract, recruit, and retain more talented
workers, which will ultimately increase the firm's business output. Too
often, we hear that small businesses loose skilled employees to larger
companies simply because a big firm is able to offer a more attractive
benefit package. Given that small businesses are responsible for a
majority of the new jobs created in this country, we need to reverse
that trend, and this bill will go a long way in rectifying this
inequity.
Clearly, cafeteria plans play a critical role in our Nation's health
care system and economy in general. The problem, though, is that in
order for companies to qualify for the tax benefits that cafeteria
plans provide, they must satisfy strict nondiscrimination rules under
the tax code. These rules exist to ensure that the benefits offered to
highly compensated employees are offered to non-highly compensated
employees as well. The rules also strive to ensure that non-highly
compensated employees in fact receive a substantial portion of the
benefits provided under the plan.
Now I want to be clear when I say that these non-discrimination rules
serve a legitimate purpose. Indeed, we need to be sure that employers
are not able to game the tax system by implementing these cafeteria
plans, and that the cafeteria plans that qualify for preferential tax
treatment are used by a majority of the employees in the company.
However, what I find to be unacceptable is the way the tax code
attempts to implement this policy under the existing rules. Currently,
many small businesses simply cannot satisfy these mechanical rules
because, through no fault of their own, they have relatively few
employees and a high proportion of owners or highly compensated
individuals. As such, were a small business to create a cafeteria plan
and violate the non-discrimination rules, certain workers within the
company would be subject to a penalty and would be required to include
a substantial portion of their contributions in their taxable income.
Consequently, many small companies simply do not even bother to
implement a cafeteria plan for fear that they will violate the non-
discrimination rules. According to the Employer's Council on Flexible
Compensation, while 38.36 million U.S. workers had access to cafeteria
plans in 1999, only 19 percent of those workers were employees of small
businesses.
To improve the current situation, the bill I am introducing today
will allow and encourage more small businesses to offer employees the
opportunity to purchase health insurance with tax-free dollars just as
larger companies and the federal government do. My bill accomplishes
this by creating a Simple Cafeteria Plan, which is modeled after the
Savings Incentive Match Plan for Employees (SIMPLE) pension plan. As
with the SIMPLE pension plan, a small business employer that is willing
to make a minimum contribution for all employees or who is willing to
match contributions will be permitted to waive the non-discrimination
rules that currently prevent these owners from otherwise offering these
benefits. This structure has worked extraordinarily well in the pension
area with little risk of abuse, and I am confident that it will be just
as successful when it comes to broad-based benefits offered through
cafeteria plans.
Under the SIMPLE Cafeteria Plan, small companies will not have to
struggle with satisfying the burdensome non-discrimination rules that
often prevent them from offering valuable employee benefits to their
workers. As a result, more small business employers will be able to
provide their workers with the employee benefits that are often
reserved for larger employers and that are otherwise unavailable
because of the non-discrimination rules.
In addition my bill will expand the types of qualified benefits that
will be able to be offered under ALL cafeteria plans--both those that
qualify under existing law as well as the new SIMPLE cafeteria plans
that will be created. Specifically, my bill modifies the rules
governing benefits offered under cafeteria plans, such as flexible
spending accounts and dependent-care assistance plans that many larger
employers offer their employees. These modifications will increase the
likelihood that employees of small businesses will utilize the
available benefits and that will increase the benefits provided for all
employees.
For example, current rules impose a ``use it or lose it'' requirement
with respect to flexible spending arrangement contributions. This means
that the employee forfeits any money he or she contributes to the
account but does not use during the plan. My bill would change that
rule and allow employees to carry over up to $500 remaining in their
account to the next plan year. The bill would also permit employees to
carry-over any unused funds to a retirement account such as a 401(k)
plan.
In either case, any carried over contributions will reduce the amount
that the employee otherwise would be able to contribute to the spending
arrangement in the following year so that the carry-over option will
not produce a greater dollar benefit for any employee. As a result,
more employees are likely to participate in these spending arrangements
because they will ultimately be able to use any funds that they
contribute without any fear of forfeiting them simply because the funds
were not used in the year of contribution.
Additionally, this legislation modifies rules that pertain to
employer-provided, dependent-care assistance plans. First, it would
increase the current $5,000 annual contribution limitation of these
plans to $10,000 if the contributing employee claims two or more
dependents on his or her tax return. This increase is significant
because it will provide these taxpayers with an opportunity to care for
not only their children but also an elderly family member who is a
dependent of an employee--a scenario that will become increasingly more
likely as the current baby-boomer generation continues to age.
Second, this bill would amend the current non-discrimination rules
that dependent-care assistance plans must satisfy. As is often the case
with the majority of small business owners who cannot, through any
fault of their own, satisfy the non-discrimination rules for
establishing a cafeteria plan, these rules often prevent the owner from
offering this valuable benefit to their employees. To remedy this
inequity, this bill would change the current mechanical thresholds such
that more small businesses can provide dependent-care assistance plans
to their employees but in a manner that does not encourage the type of
abuse that the non-discrimination rules are intended to prevent.
Small businesses are the backbone of the American economy. According
to the Small Business Administration, small businesses represent 99
percent of all employers, employ 51 percent of the private-sector
workforce, and contribute 51 percent of the private-sector output. It
is therefore critical that small businesses owners are able to offer
their employees the benefits that cafeteria plans provide so that more
of our nation's workers have the opportunity to purchase quality
healthcare and provide security for their families.
The ``SIMPLE Cafeteria Plan Act of 2005'' achieves those objectives,
and it does so in a manner that the employers and employees are able to
afford. Although the use of pre-tax dollars to acquire these benefits
reduces current federal revenues, the opportunity to provide small
business employees these same benefits to workers and their families
rather than relying on the public sector more than justifies this
minimal investment. Therefore, I urge my colleagues to join me in
supporting this important legislation as we work with you to enact this
bill into law.
I ask unanimous consent that the text of the bill be printed in the
Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 723
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
[[Page S3292]]
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:
[[Page S3293]]
``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
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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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