I 

111TH CONGRESS 

1ST SESSION H. R. 2526 

To amend the Internal Revenue Code of 1986 to increase participation in 

medical flexible spending arrangements. 

IN THE HOUSE OF REPRESENTATIVES 

MAY 20, 2009 

Mr. LARSON of Connecticut (for himself, Mr. CAMP, Mr. KIND, and Mr. 

BOUSTANY) 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 increase 

participation in medical flexible spending arrangements. 

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 ‘‘Medical FSA Improve5 ment Act of 2009’’. 

6 SEC. 2. ADDITION OF TAXABLE DISTRIBUTIONS. 

7 (a) TREATMENT OF AMOUNTS EXPENDED FOR MED8 ICAL CARE.—Section 105 of the Internal Revenue Code 

9 of 1986 (relating to amounts received under accident and 


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1 health plans) is amended by inserting at the end the fol2 lowing new subsection: 

3 ‘‘(k) AMOUNTS PAID UNDER MEDICAL FLEXIBLE

4 SPENDING ARRANGEMENTS.— 

5 ‘‘(1) APPLICATION OF SUBSECTION (b).—For 

6 purposes of subsection (b) and section 106, a plan 

7 shall not fail to be treated as flexible spending ar8 rangement solely because such plan, in addition to 

9 reimbursing expenses incurred for medical care (as 

10 defined in subsection (b)) during the plan year, dis11 tributes for the plan year the lesser of— 

12 ‘‘(A) all or a portion of the employee’s bal13 ance, or 

14 ‘‘(B) $1,500. 

15 ‘‘(2) LIMITATION.—Paragraph (1) shall apply 

16 only in the case that the balance under such ar17 rangement for a plan year is distributed after the 

18 close of the plan year to which the balance relates 

19 and not later than the end of the 7th month fol20 lowing the close of such plan year. 

21 ‘‘(3) TAX TREATMENT OF DISTRIBUTION.—Any 

22 distribution to which paragraph (1) applies shall be 

23 treated as remuneration of the employee for 

24 emploment for the taxable year in which it is distrib25 uted. 


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1 ‘‘(4) FLEXIBLE SPENDING ARRANGEMENT.— 

2 The term ‘flexible spending arrangement’ means a 

3 benefit program within the meaning of section 

4 106(c)(2) (relating to long-term care benefits). 

5 ‘‘(5) TERMINATION.—Paragraph (1) shall not 

6 apply to any distribution for a plan year beginning 

7 after December 31, 2011.’’. 

8 (b) ADDITIONAL DEFERRED COMPENSATION EXCEP9 TION.—Paragraph (2) of section 125(d) of such Code (re10 lating to deferred compensation under a cafeteria plan) 

11 is amended by inserting at the end the following new sub12 paragraph: 

13 ‘‘(E) EXCEPTION FOR CERTAIN FLEXIBLE

14 SPENDING ARRANGEMENTS.—Subparagraph (A) 

15 shall not apply to a flexible spending arrange16 ment (within the meaning of section 106(c)(2)) 

17 as a result of amounts being distributed to the 

18 covered employee in accordance with section 

19 105(k).’’. 

20 (c) CONFORMING AMENDMENT.—Section 409A(d)(1) 

21 of such Code is amended by striking ‘‘and’’ at the end 

22 of subparagraph (A), by striking the period at the end 

23 of subparagraph (B) and inserting ‘‘, and’’, and by adding 

24 at the end the following: 


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1 ‘‘(C) a flexible spending arrangement 

2 which is subject to section 105(k).’’. 

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

4 this section shall apply to plan years beginning after De5 cember 31, 2008. 

6 (e) TRANSITION RULES.—In the case of plan years 

7 that begin before the date of the enactment of this Act, 

8 in implementing the amendments made by this section a 

9 flexible spending arrangement may allow an individual to 

10 make a new election or to revise an existing election under 

11 such arrangement so long as such new or revised election 

12 is made within 90 days after the date of the enactment 

13 of this Act. 

14 SEC. 3. SELF-EMPLOYED INDIVIDUALS. 

15 (a) IN GENERAL.—Subsection (d) of section 125 of 

16 the Internal Revenue Code of 1986 (defining cafeteria 

17 plan) is amended by adding at the end the following new 

18 paragraph: 

19 ‘‘(3) EMPLOYEE TO INCLUDE SELF-EM20 PLOYED.—In the case of a medical flexible spending 

21 arrangement— 

22 ‘‘(A) IN GENERAL.—The term ‘employee’ 

23 includes an individual who is an employee with24 in the meaning of section 401(c)(1) (relating to 

25 self-employed individuals). 


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1 ‘‘(B) LIMITATION.—The amount which 

2 may be excluded under subsection (a) with re3 spect to a participant in a cafeteria plan by rea4 son of being an employee under subparagraph 

5 (A) shall not exceed the lesser of— 

6 ‘‘(i) the employee’s earned income 

7 (within the meaning of section 401(c)) de8 rived from the trade or business with re9 spect to which the cafeteria plan is estab10 lished, or 

11 ‘‘(ii) $5,000.’’. 

12 (b) APPLICATION TO BENEFITS WHICH MAY BE

13 PROVIDED UNDER CAFETERIA PLAN.— 

14 (1) ACCIDENT AND HEALTH PLANS.—Sub15 section (g) of section 105 of such Code is amended 

16 to read as follows: 

17 ‘‘(g) EMPLOYEE INCLUDES SELF-EMPLOYED.—For 

18 purposes of this section, the term ‘employee’ includes an 

19 individual who is an employee within the meaning of sec20 tion 401(c)(1) (relating to self-employed individuals).’’. 

21 (2) CONTRIBUTIONS BY EMPLOYERS TO ACCI22 DENT AND HEALTH PLANS.— 

23 (A) IN GENERAL.—Section 106 of such 

24 Code is amended by adding after subsection (e) 

25 the following new subsection: 


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1 ‘‘(f) EMPLOYER TO INCLUDE SELF-EMPLOYED.— 

2 ‘‘(1) IN GENERAL.—For purposes of this sec3 tion, in the case of a medical flexible spending ac4 count the term ‘employee’ includes an individual who 

5 is an employee within the meaning of section 

6 401(c)(1) (relating to self-employed individuals). 

7 ‘‘(2) LIMITATION.—The amount which may be 

8 excluded under subsection (a) with respect to an in9 dividual treated as an employee by reason of para10 graph (1) shall not exceed the lesser of— 

11 ‘‘(A) the employee’s earned income (within 

12 the meaning of section 401(c)) derived from the 

13 trade or business with respect to which the acci14 dent or health insurance was established, or 

15 ‘‘(B) $5,000. 

16 ‘‘(3) TAX TREATMENT OF DISTRIBUTION.—Any 

17 distribution to which 105(k) applies shall be treated 

18 as self-employment income (as defined in section 

19 1402(b)) of the employee for the taxable year in 

20 which it is distributed. 

21 ‘‘(4) ELECTION.—Paragraph (1) shall not apply 

22 for any taxable year if the employee elects to have 

23 paragraph (1) not apply for such taxable year.’’. 

24 (B) COORDINATION WITH SECTION

25 106(f).—Paragraph (2) of section 162(l) of 


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1 such Code is amended by adding at the end the 

2 following new subparagraph: 

3 ‘‘(D) COORDINATION WITH SECTION

4 106(f).—No deduction shall be allowed under 

5 paragraph (1) for any amount with respect to 

6 which an election is in effect under section 

7 106(f)(4).’’. 

8 (c) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to plan years beginning after De10 cember 31, 2008. 

11 (d) TRANSITION RULES.—In the case of plan years 

12 that begin before the date of the enactment of this Act, 

13 in implementing the amendments made by this section a 

14 flexible spending arrangement may allow an individual to 

15 make an election under such arrangement so long as such 

16 election is made within 90 days after the date of the enact17 ment of this Act. 

Æ 


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