II 

116TH CONGRESS 

2D SESSION S. 4371 

To amend the Internal Revenue Code of 1986 to require employers to cash 

out the flexible spending accounts of employees who separate from employment, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

JULY 30, 2020 

Ms. SMITH (for herself and Ms. SINEMA) introduced the following bill; which 

was read twice and referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to require 

employers to cash out the flexible spending accounts 

of employees who separate from employment, and for 

other purposes. 

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

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Fair FSAs Act of 

5 2020’’. 


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1 SEC. 2. CASH-OUTS OF FLEXIBLE SPENDING ACCOUNTS. 

2 (a) IN GENERAL.—Subsection (h) of section 125 of 

3 the Internal Revenue Code of 1986 is amended to read 

4 as follows: 

5 ‘‘(h) SPECIAL RULES FOR UNUSED BENEFITS IN

6 HEALTH FLEXIBLE SPENDING ARRANGEMENTS.— 

7 ‘‘(1) DISTRIBUTIONS UPON TERMINATION OF

8 EMPLOYMENT.— 

9 ‘‘(A) IN GENERAL.—If a benefit is pro10 vided under a cafeteria plan through employer 

11 contributions to a health flexible spending ar12 rangement— 

13 ‘‘(i) such plan or arrangement shall 

14 not fail to be treated as a cafeteria plan or 

15 health flexible spending arrangement (and 

16 shall not fail to be treated as an accident 

17 or health plan) for purposes of this title 

18 merely because such arrangement provides 

19 for an election meeting the requirements of 

20 subparagraph (B), and 

21 ‘‘(ii) such benefit shall not be treated 

22 as a qualified benefit for purposes of this 

23 section unless such arrangement provides 

24 for such election. 

25 ‘‘(B) ELECTION.—The requirements of 

26 this subparagraph are met if the health flexible 


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1 spending arrangement provides that, if the em2 ployee terminates employment with the em3 ployer (whether voluntarily or involuntarily) 

4 during the plan year, the employee may elect to 

5 receive in cash an amount equal to— 

6 ‘‘(i) the excess, if any, of— 

7 ‘‘(I) all contributions made to the 

8 arrangement for such plan year as of 

9 the date the employee terminates em10 ployment with the employer, over 

11 ‘‘(II) the amount of reimburse12 ments received by the employee under 

13 such arrangement during such plan 

14 year as of the date the employee 

15 ceases to be a participant in the ar16 rangement (including any grace pe17 riod), reduced by 

18 ‘‘(ii) the amount of tax withheld 

19 under subparagraph (C). 

20 ‘‘(C) DEDUCTION OF TAX.—In paying to 

21 an employee the cash payment elected under 

22 subparagraph (B), the employer shall deduct 

23 and withhold from the employee an amount 

24 equal to— 


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1 ‘‘(i) the taxes which the employer 

2 would have been required to deduct and 

3 withhold if the employee had received the 

4 equivalent amount of wages instead of hav5 ing made salary reduction contributions to 

6 the health flexible spending arrangement, 

7 and 

8 ‘‘(ii) in the case of a cash payment of 

9 any employer contributions to the health 

10 flexible spending arrangement, the taxes 

11 which the employer would have been re12 quired to deduct and withhold if the em13 ployee had received the equivalent amount 

14 of wages in lieu of such contributions, 

15 determined as if the employee had received such 

16 wages on the date the cash payment is made. 

17 The amount of tax so deducted and withheld 

18 shall be remitted by the employer in the same 

19 manner as amounts collected under section 

20 3102. 

21 ‘‘(2) QUALIFIED RESERVIST DISTRIBUTIONS.— 

22 ‘‘(A) IN GENERAL.—For purposes of this 

23 title, a plan or other arrangement shall not fail 

24 to be treated as a cafeteria plan or health flexi25 ble spending arrangement (and shall not fail to 


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1 be treated as an accident or health plan) merely 

2 because such arrangement provides for qualified 

3 reservist distributions. 

4 ‘‘(B) QUALIFIED RESERVIST DISTRIBU5 TION.—For purposes of this paragraph, the 

6 term ‘qualified reservist distribution’ means any 

7 distribution to an individual of all or a portion 

8 of the balance in the employee’s account under 

9 such arrangement if— 

10 ‘‘(i) such individual was (by reason of 

11 being a member of a reserve component 

12 (as defined in section 101 of title 37, 

13 United States Code)) ordered or called to 

14 active duty for a period in excess of 179 

15 days or for an indefinite period, and 

16 ‘‘(ii) such distribution is made during 

17 the period beginning on the date of such 

18 order or call and ending on the last date 

19 that reimbursements could otherwise be 

20 made under such arrangement for the plan 

21 year which includes the date of such order 

22 or call.’’. 

23 (b) TREATMENT AS ACCIDENT OR HEALTH PLAN.— 

24 Section 106 of the Internal Revenue Code of 1986 is 


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1 amended by adding at the end the following new sub2 section: 

3 ‘‘(h) DISTRIBUTIONS UPON TERMINATION OF EM4 PLOYMENT.—A plan shall not fail to be treated as a health 

5 flexible spending arrangement under this section or sec6 tion 105 merely because such plan provides for an election 

7 meeting the requirements of section 125(h)(1)(B).’’. 

8 (c) EXCISE TAX ON FAILURE TO PROVIDE DIS9 TRIBUTIONS UPON TERMINATION OF EMPLOYMENT.— 

10 (1) IN GENERAL.—Chapter 43 of the Internal 

11 Revenue Code of 1986 is amended by inserting after 

12 section 4980 the following new section: 

13 ‘‘SEC. 4980A. FAILURE TO PROVIDE DISTRIBUTIONS FROM 

14 HEALTH FLEXIBLE SPENDING ARRANGE15 MENTS UPON TERMINATION OF EMPLOY16 MENT. 

17 ‘‘(a) GENERAL RULE.—There is hereby imposed a 

18 tax on the failure of a covered cafeteria plan to meet the 

19 requirements of section 125(h)(1) (including a failure to 

20 withhold and remit any tax as required by subparagraph 

21 (C) thereof) with respect to any employee. 

22 ‘‘(b) AMOUNT OF TAX.— 

23 ‘‘(1) IN GENERAL.—The amount of the tax im24 posed by subsection (a) on any failure with respect 


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1 to an employee shall be $100 for each day in the 

2 noncompliance period with respect to such failure. 

3 ‘‘(2) NONCOMPLIANCE PERIOD.—For purposes 

4 of this section, the term ‘noncompliance period’ 

5 means, with respect to any failure, the period— 

6 ‘‘(A) beginning on the date such failure 

7 first occurs, and 

8 ‘‘(B) ending on the earlier of— 

9 ‘‘(i) the date such failure is corrected, 

10 or 

11 ‘‘(ii) the date which is 6 months after 

12 the date the employee terminates employ13 ment with the employer. 

14 ‘‘(3) LIMITATIONS.—Rules similar to the rules 

15 of subsections (b)(3) and (c) of section 4980B shall 

16 apply with respect to the tax under this section. 

17 ‘‘(c) COVERED CAFETERIA PLAN.—For purposes of 

18 this section, the term ‘covered cafeteria plan’ means a caf19 eteria plan (as defined in section 125(d)) under which a 

20 benefit is provided through employer contributions to a 

21 health flexible spending arrangement. 

22 ‘‘(d) LIABILITY FOR TAX.—Rules similar to the rules 

23 of section 4980B(e) shall apply for purposes of deter24 mining liability for the tax imposed under this section.’’. 


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1 (2) CLERICAL AMENDMENT.—The table of sec2 tions for chapter 43 of such Code is amended by in3 serting after the item relating to section 4980 the 

4 following new item: 

‘‘Sec. 4980A. Failure to provide distributions from health flexible spending arrangements upon termination of employment.’’. 

5 (d) EFFECTIVE DATE.— 

6 (1) IN GENERAL.—The amendments made by 

7 this section shall apply to plan years beginning after 

8 the date of the enactment of this Act. 

9 (2) PLAN AMENDMENTS.—A plan or arrange10 ment shall not be treated as violating the require11 ments of section 125(h)(1) of the Internal Revenue 

12 Code of 1986, as added by this section (including for 

13 purposes of section 4980A of such Code, as so 

14 added), if— 

15 (A) the plan or arrangement is amended to 

16 meet such requirements on or before the last 

17 day of the first plan year beginning after the 

18 date of the enactment of this Act, 

19 (B) such amendment applies retroactively 

20 to the first day of such first plan year, and 

21 (C) the plan or arrangement operates in 

22 accordance with such requirements as of the 

23 first day of such first plan year. 


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1 A plan or arrangement shall not be treated as failing 

2 to satisfy any requirement of the Internal Revenue 

3 Code of 1986 merely because the plan or arrange4 ment operates as provided in subparagraph (C). 

5 SEC. 3. EXTENSION OF TIME FOR FILING FSA CLAIMS. 

6 (a) IN GENERAL.—Notwithstanding any applicable 

7 rule or regulation under section 125 of the Internal Rev8 enue Code of 1986, a plan or other arrangement shall not 

9 fail to be treated as a cafeteria plan or health flexible 

10 spending arrangement merely because such arrangement 

11 permits participants who make the certification under sub12 section (b) to carry over any amount of unused benefit 

13 or contribution (without limitation) from any plan year be14 ginning or ending in 2020 to the subsequent plan year. 

15 (b) CERTIFICATION BY EMPLOYEE.—In applying for 

16 any carryover permitted pursuant to subsection (a), the 

17 employee shall certify that the amount to be carried over 

18 is attributable to a reduction in expected elective health 

19 care expenses in the plan year due to the outbreak of 

20 coronavirus disease 2019 (COVID–19) in the United 

21 States. 

22 (c) DEFINITIONS.—Any term used in this section 

23 which is also used in section 106 or 125 of the Internal 

24 Revenue Code of 1986 or the rules or regulations thereVerDate Sep 11 2014 20:11 Aug 13, 2020 Jkt 099200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S4371.IS S4371

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1 under shall have the same meaning as when used in such 

2 section or regulations. 

Æ 


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