I 

108TH CONGRESS 

1ST SESSION H. R. 176

To amend the Internal Revenue Code of 1986 to allow amounts elected 

for reimbursement of medical care expenses under a health flexible spending arrangement that are unused during a plan year to be carried 

over for such use for subsequent plan years. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 7, 2003

Mr. ROYCE (for himself and Mr. KENNEDY of Minnesota) introduced the 

following bill; which was referred to the Committee on Ways and Means 

A BILL

To amend the Internal Revenue Code of 1986 to allow 

amounts elected for reimbursement of medical care expenses under a health flexible spending arrangement that 

are unused during a plan year to be carried over for 

such use for subsequent plan years.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. CARRYOVER OF UNUSED BENEFITS FROM 

4 HEALTH FLEXIBLE SPENDING ARRANGE5 MENTS. 

6 (a) IN GENERAL.—Section 125 of the Internal Rev7 enue Code of 1986 (relating to cafeteria plans) is amended 
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1 by redesignating subsections (h) and (i) as subsections (i) 

2 and (j), respectively, and by inserting after subsection (g) 

3 the following new subsection: 

4 ‘‘(h) ALLOWANCE OF CARRYOVERS OF UNUSED

5 FUNDS TO SUBSEQUENT TAXABLE YEARS.—

6 ‘‘(1) IN GENERAL.—For purposes of this title—

7 ‘‘(A) a plan or other arrangement shall not 

8 fail to be treated as a cafeteria plan or health 

9 flexible spending arrangement, and 

10 ‘‘(B) no amount shall be required to be in11 cluded in gross income by reason of this section 

12 or any other provision of this chapter, 

13 solely because under such plan or other arrangement 

14 any amounts elected for reimbursement of eligible 

15 medical care expenses under a health flexible spend16 ing arrangement which are unused during a plan 

17 year may be carried forward to one or more suc18 ceeding plan years. 

19 ‘‘(2) AMOUNTS INCLUDED IN GROSS INCOME.—

20 Any carryover amount described in paragraph (1) 

21 shall be included in gross income for purposes of 

22 subtitle and subtitle B (relating to withholding and 

23 employment taxes). Any such carryover shall be 

24 treated as wages for the taxable year from which the 

25 amount was carried. 
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1 ‘‘(3) TREATMENT OF AND LIMITATION ON

2 ROLLOVER AMOUNTS.—Amounts carried over under 

3 paragraph (1) shall be limited as follows: 

4 ‘‘(A) Amounts carried forward pursuant to 

5 paragraph (1) shall be limited to $2,000 per 

6 plan year (as indexed for future years by the 

7 cost of living adjustment determined under sec8 tion 1(f)(3)). Any unused amounts during any 

9 plan year in excess of this amount shall be for10 feited and shall be treated in accordance with 

11 the applicable regulations issued under section 

12 125. 

13 ‘‘(B) Amounts carried forward pursuant to 

14 paragraph (1) shall be used only for reimburse15 ment of qualified medical care expenses (as de16 fined in paragraph (5)). 

17 ‘‘(C) The employer may invest such carry18 over amounts in guaranteed principal and inter19 est investments which provide 100 percent li20 quidity within the account. 

21 ‘‘(4) FORFEITURES FOR TERMINATING PARTICI22 PANTS PERMITTED.—Nothing in this subsection 

23 shall preclude the application of the requirement set 

24 forth in the regulations promulgated under section 

25 125 that participants who terminate participation 
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1 prior to the end of the plan year must forfeit any 

2 health flexible spending arrangement account bal3 ance provided such amounts do not consist of carry 

4 over amounts described in paragraph (1). 

5 ‘‘(5) QUALIFIED MEDICAL EXPENSES.—

6 ‘‘(A) IN GENERAL.—The term ‘qualified 

7 medical expenses’ means amounts paid for med8 ical care (as defined in section 213(d)) for such 

9 individual, the spouse of such individual, and 

10 any dependent (as defined in section 152) of 

11 such individual, but only to the extent such 

12 amounts are not compensated for by insurance 

13 or otherwise.

14 ‘‘(B) HEALTH INSURANCE EXPENSES.—

15 ‘‘(i) IN GENERAL.—Subparagraph (A) 

16 shall not apply to any payment for cov17 erage under a group health plan of an em18 ployer of the health flexible spending ar19 rangement participant or the spouse of the 

20 participant.

21 ‘‘(ii) EXCEPTIONS.—Clause (i) shall 

22 not apply to any expense for coverage 

23 under—
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1 ‘‘(I) a group health plan during 

2 any period of continuation coverage 

3 required under any Federal law, 

4 ‘‘(II) a qualified long-term care 

5 insurance contract (as defined in sec6 tion 7702B(b)), 

7 ‘‘(III) a Medicare supplemental 

8 policy under section 1882 of the So9 cial Security Act, or 

10 ‘‘(IV) an individual health insur11 ance policy. 

12 ‘‘(6) CARRYOVER AMOUNTS TO BE EXPENDED

13 AFTER HEALTH FLEXIBLE SPENDING ARRANGEMENT

14 CONTRIBUTION.—All qualified medical care expenses 

15 that are submitted for reimbursement must be reim16 bursed first from amounts in the participant’s health 

17 care flexible spending arrangement that do not con18 stitute carryover amounts described in paragraph 

19 (1), to the extent such amounts may be reimbursed 

20 from the portion of the health flexible spending ar21 rangement that does not consist of carryover 

22 amounts pursuant to rules set forth in the regula23 tions promulgated under section 125 relative to 

24 health flexible spending arrangements. 
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1 ‘‘(7) TREATMENT OF CARRYOVER AMOUNTS

2 FOLLOWING TERMINATION OF EMPLOYMENT OR

3 OTHER LOSS OF ELIGIBILITY.—Upon a termination 

4 of employment or other loss of eligibility under the 

5 health care flexible spending arrangement, the em6 ployer must provide for one or more of the following 

7 methods of distribution of a participant’s accumu8 lated carryover amount plus interest earned and al9 located to such participant pursuant to paragraph 

10 (3)(C): 

11 ‘‘(A) The participant’s accumulated carry12 over amount, including any interest earned and 

13 allocated to such health care spending arrange14 ment balance pursuant to paragraph (3)(C), 

15 may be retained by the employer to be used to 

16 reimburse qualifying medical care expenses of 

17 the former participant and the former employ18 ee’s spouse or dependents incurred after the 

19 date of termination; 

20 ‘‘(B) The carryover amount calculated as 

21 of the day of the termination of employment or 

22 other loss of eligibility may be transferred to 

23 the subsequent employer to be used by the 

24 former participant in a manner consistent with 

25 the rule of this subsection, provided the subse-
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1 quent employer provides a similar arrangement 

2 and agrees in writing; or 

3 ‘‘(C) The employer may distribute the car4 ryover amount, including any interest earned 

5 and allocated to such account pursuant to para6 graph (3)(C), to any appropriate vehicle as de7 fined by the Department of Treasury in regula8 tions or to the participant in cash. If carryover 

9 amounts are received in cash, the interest 

10 earned and allocated to such participant pursu11 ant to paragraph (3)(C) shall be treated as or12 dinary income for purposes of this subtitle. 

13 The employer must offer at least one of the options 

14 set forth above; however, nothing in this subsection 

15 requires the employer to offer more than one option. 

16 If the employer offers more than one of the options 

17 listed above, the employee must choose the applica18 ble option within 60 days of the date of termination 

19 of employment or loss of eligibility. Should no elec20 tion be made, the funds will revert to the employer 

21 consistent with Federal regulations. If the termi22 nation of employment or loss of eligibility is a result 

23 of the participant’s death, the surviving spouse, or 

24 dependents, if no surviving spouse, will receive the 
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1 participant’s carry over funds in a manner con2 sistent with paragraph (7)(C).’’. 

3 (b) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to taxable years beginning after 

5 December 31, 2003.

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