To amend the Internal Revenue Code of 1986 to increase participation in medical flexible spending arrangements.

Summary: Medical FSA Improvement Act of 2009 - Amends the Internal Revenue Code to: (1) allow an increased exclusion from gross income through 2011 for distributions from a medical flexible spending arrangement; and (2) make self-employed individuals eligible for benefits under medical flexible spending arrangements and accident and health plans.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Medical FSA Improvement Act of 
2009''.

SEC. 2. 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.

SEC. 3. 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.