[Congressional Record Volume 155, Number 69 (Wednesday, May 6, 2009)]
[Senate]
[Pages S5236-S5239]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE (for herself, Mr. Bond, and Mr. Bingaman):
  S. 988. 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 2009, which will increase the access to quality, 
affordable health care for millions of small business owners and their 
employees. I am pleased that my good friends, Senator Bond from 
Missouri and Senator Bingaman from New Mexico, have agreed to cosponsor 
this critical, bipartisan piece of legislation. We have introduced this 
legislation together since 2005.
  In order to help small businesses increase their employees' access to 
health insurance and other benefits, and help them compete for talented 
workers, we are introducing the SIMPLE Cafeteria Plan Act. This bill 
will enable small business employees to purchase health insurance with 
tax-free dollars in the same way that many employees of large companies 
already do--in their cafeteria plans. This legislation is modeled after 
the Savings Incentive Match Plan for Employees SIMPLE, Pension Plan 
enacted in 1996.
  As former Chair and now Ranking Member of the Senate Small Business 
Committee, if there's one concern I've heard time and again--from small 
businesses in Maine and across the country--it's the exorbitant cost to 
small businesses of providing health insurance to their employees. 
Throughout America, health insurance premiums have increased by a 
staggering 89 percent since 2000--far outpacing inflation and wage 
gains. In Maine, the annual premium for the most heavily subscribed 
policy in the small group insurance market is $5,400 for individual 
coverage, and over $16,000 for a family plan.
  Clearly our Nation's health care system is terribly broken--and the 
majority of the uninsured--52 percent--are either self-employed, work 
for a small business with 100 or fewer employees, or are dependent upon 
someone who does. I am pleased that the Congress is now in the midst of 
a serious reform effort that will result in a much better system of 
delivering health care. In order to address the problem of the working 
uninsured, we must address access and affordability in small 
businesses. The bill we are introducing today will do just that.
  So why are our Nation's small businesses, which are our country's job 
creators and the true engine of our economic growth, not offering 
health insurance? Survey after survey tells us that the main reason is 
that they cannot afford to offer it, or other benefits. Still other 
small firms can only afford to pay a portion of their employees' health 
insurance premiums. As a result, countless employees of small business 
must try to obtain health insurance from the individual market rather 
than through their work place. As we debate reforming health insurance, 
we must consider cafeteria plans--Section 125 plans, as they are often 
known--which are a proven vehicle for access, and should be a key 
component to reform. I would like to add that another component to 
reform that must be considered is the SHOP Act, which I reintroduced 
yesterday with Senators Durbin and Lincoln, which would also help to 
reverse the pernicious problems of access and affordability of health 
insurance.
  Currently, many large employers, and even the Federal Government, 
allow employees to purchase health insurance, and other qualified 
benefits, with tax-free dollars. Cafeteria plans allow employers to 
offer health benefits with pre-tax dollars. As the name suggests, 
cafeteria plans are programs where employees can purchase a variety of 
qualified benefits. Specifically, cafeteria plans offer employees great 
flexibility in selecting their desired benefits while allowing them to 
disregard those benefits that do not fit their particular needs. 
Moreover, the employees are usually purchasing benefits at a lower cost 
because their employers are often able to obtain a reduced group rate 
prices.
  Typically, in cafeteria plans, a combination of employer 
contributions and employee contributions are used to fund the accounts 
that employees used to buy specific benefits. Under current law, 
qualified benefits include health insurance, dependent-care 
reimbursement, life and disability insurance. Unfortunately, long term 
care insurance is not currently a qualified benefit available for 
purchase in cafeteria plans. I will come back to long term care 
insurance in a moment.
  Again, cafeteria plans already have a proven record of providing good 
benefits to a wide group of employees. However, in order for companies 
to qualify for cafeteria plans they must satisfy the tax code's strict 
non-discrimination rules and these rules are a major impediment to 
small employers being able to offer benefits to employees. These rules 
exist to ensure that companies offer the same benefits to their low-
wage employees along with their highly compensated employees.
  Now, I want to be clear. I believe that these non-discrimination 
rules serve a legitimate purpose and are necessary employee 
protections. Indeed, we need to ensure that employers are not able to 
game the tax system to benefit only upper income employees or the 
business owners. 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 them from 
otherwise offering these benefits. This structure has worked 
extraordinarily well in the pension area with little risk of abuse. I 
am confident that it will be just as successful when it comes to broad-
based benefits offered through cafeteria plans. The SIMPLE Cafeteria 
Plan Act requires the employer to either match contributions of 3 
percent of an employee's income or contribute 2 percent without the 
employee's contribution.
  An essential change allows small business owners themselves to 
participate in cafeteria plans generally. Current law punitively 
prohibits the owners of small businesses from participating in these 
benefit plans. As a result, if a business owner is unable to obtain any 
benefit for himself or his own family he is unlikely to undertake the 
time and financial commitment of offering the benefit. It is time to 
remove this punitive prohibition which I believe will expand access to 
this flexible platform for employee benefits.
  Another improvement generally applicable to all cafeteria plan law 
updates the rules regarding depended care flexible spending accounts, 
DCFSA. The bill increases the amount that can be excluded to $7,500 for 
one dependent or $10,000 for two or more dependents. Had the original 
$5,000 limit for DCFSA been indexed for inflation when it was created 
in 1986, it would have risen to $9,692. The bill also indexes these 
amounts for future inflation so that families will not see an erosion 
of their benefit in the future. In order for millions of working moms 
to be able to

[[Page S5237]]

work outside of the home, they must have help in addressing child care 
costs. It is critical to note that it is not just working parents but 
an increasing number of baby-boom adults who need help caring for aging 
dependent parents. Increasing the dependent care exclusion in flexible 
spending accounts is an essential update to cafeteria plan law for 
working families.
  Another provision of the bill generally revises the use it or lose it 
rule under current law, and permits participants to carry over up to 
$500 left in a health-care or dependent-care flexible spending account 
to the next plan year. Such unused contributions could also be carried 
over to the employee's retirement account, such as a 401(k) plan, or to 
a Health Savings Account. In either case, any carried over 
contributions will reduce the amount that the employee could contribute 
to the flexible spending account or pension plan in the subsequent 
year. The bill indexes the carry-over amount for inflation.
  Finally, the bill also works to address our aging populations' need 
for long-term care insurance which is also a probable component to the 
debate on health care reform. In the U.S., nearly half of all seniors 
age 65 or older will need long-term care at some point in their life. 
Unfortunately, most seniors have not adequately prepared for this 
possibility, just as many working age individuals have not given much 
thought to their eventual long-term care needs. With the cost of a 
private room in a nursing home averaging more than $74,000 annually, 
many Americans risk losing their life savings--and jeopardizing their 
children's inheritance--by failing to properly plan for the long-term 
care services they will need as they grow older.
  To address this problem, this bill would allow employees to purchase 
long-term care insurance coverage through their cafeteria plans and 
flexible spending arrangements. Expanding eligibility of these benefits 
will make long-term care insurance more affordable and help Americans 
prepare for their future long-term care needs.
  If more small business owners are able to offer their employees the 
chance to enjoy a variety of employee benefits these firms will be more 
likely to attract, recruit, and retain talented workers. This will 
ultimately make small enterprises more competitive. Therefore, I urge 
my colleagues to join Senator Bond and Senator Bingaman and me in 
cosponsoring this important legislation as we work together to achieve 
broader health care reform.
  Mr. President, I ask unanimous consent that the text of the bill and 
a bill summary be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 988

       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 2009''.
       (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 (i) and (j) as 
     subsections (j) and (k), respectively, and by inserting after 
     subsection (h) the following new subsection:
       ``(i) 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.--
       ``(i) Predecessors.--Any reference in this paragraph to an 
     employer shall include a reference to any predecessor of such 
     employer.

[[Page S5238]]

       ``(ii) Aggregation rules.--All persons treated as a single 
     employer under subsection (a) or (b) of section 52, or 
     subsection (n) or (o) of section 414, shall be treated as one 
     person.
       ``(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, 2009.

     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.--Subsection (g) of section 
     105 (relating to amounts received under accident and health 
     plans) 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 inserting 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, 
     2009.

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

       (a) Modification of Rules.--
       (1) In general.--Section 125, as amended by section 2, is 
     amended by redesignating subsections (j) and (k) as 
     subsections (k) and (l), respectively, and by inserting after 
     subsection (i) the following new subsection:
       ``(j) 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 2010, 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 `2009' 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).

[[Page S5239]]

       ``(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.''.
       (2) Conforming amendments.--
       (A) The heading for section 125 is amended by inserting 
     ``and flexible spending arrangements'' after ``plans''.
       (B) 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''.
       (b) Technical Amendments.--
       (1) Section 106 is amended by striking subsection (e) 
     (relating to FSA and HRA Terminations to Fund HSAs).
       (2) Section 223(c)(1)(B)(iii)(II) is amended to read as 
     follows:

       ``(II) the individual is transferring the entire balance of 
     such arrangement as of the end of the plan year to a health 
     savings account pursuant to section 125(j)(2)(A)(ii), in 
     accordance with rules prescribed by the Secretary.''.

       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

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

       (a) Health Benefits.--Section 106, as amended by section 
     4(b)(1), 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(j)) 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 2010, 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 `2009' 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 $7,500 
     ($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.--In the case of taxable 
     years beginning after 2010, each dollar amount under 
     subparagraph (A) shall be increased by an amount equal to--
       ``(i) such dollar, 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 `2009' 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.''.
       (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 2010, 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, 
     2009.
                                  ____


                 The SIMPLE Cafeteria Plan Act of 2009

       Small businesses face a crisis when it comes to securing 
     affordable, quality health care and other benefits for their 
     employees. Of the working uninsured, who make up a majority 
     of the uninsured--52 percent--are either self-employed or 
     work for a small business with 100 or fewer employees or are 
     dependent upon someone who does. The SIMPLE Cafeteria Plan 
     Act is modeled after the Savings Incentive Match Plan for 
     Employees (SIMPLE) pension plan enacted in 1996 and it will 
     address access and affordability for health insurance 
     coverage and for other employee benefits. The legislation 
     also updates current law for all cafeteria plans for 
     dependent care flexible spending accounts (DCFSA) and long-
     term care insurance.
       First, the SIMPLE Cafeteria Plan Act will increase access 
     to quality, affordable health care for millions of small 
     business owners and their employees by amending the non-
     discrimination rules so that the employer must either: (1) 
     make a minimum 3% matching contribution to amounts 
     contributed by non-highly compensated employees to the SIMPLE 
     Cafeteria Plan; or (2) contribute a minimum of 2% of 
     compensation on behalf of each non-highly compensated 
     employee eligible to participate in the plan. The bill 
     eliminates the prohibition against small business owners' 
     participation in cafeteria plans.
       For all flexible spending accounts, the bill revises the 
     ``use it or lose it'' rule under current law, and permits 
     participants to carry over up to $500 left in a health-care 
     or dependent-care flexible spending account to the next plan 
     year. Such unused contributions could also be carried over to 
     the employee's retirement account, such as a 401(k) plan, or 
     to a Health Savings Account. In either case, any carried over 
     contributions will reduce the amount that the employee could 
     contribute to the flexible spending account or pension plan 
     in the subsequent year. The bill indexes the carry-over 
     amount for inflation.
       The SIMPLE Cafeteria Act also updates DCFSA limits for any 
     cafeteria plan by increasing the amount that can be excluded 
     to $7,500 for one dependent or $10,000 for two or more 
     dependents. Had the original $5,000 limit for DCFSA been 
     indexed for inflation when it was created in 1986, it would 
     have risen to $9,692. The bill also indexes these amounts for 
     future inflation so that families will not see an erosion of 
     their benefit in the future.
       Finally, the bill allows long-term care benefits to be 
     provided under a cafeteria plan, thereby reversing the 
     current law prohibition against such benefits.
                                 ______