II 

110TH CONGRESS 

1ST SESSION S. 555 

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. 

IN THE SENATE OF THE UNITED STATES 

FEBRUARY 12, 2007 

Ms. SNOWE (for herself, Mr. BOND, and Mr. BINGAMAN) 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 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. 

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 (a) SHORT TITLE.—This Act may be cited as the 

5 ‘‘SIMPLE Cafeteria Plan Act of 2007’’. 


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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment 

4 to, or repeal of, a section or other provision, the reference 

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986. 

7 SEC. 2. ESTABLISHMENT OF SIMPLE CAFETERIA PLANS 

8 FOR SMALL BUSINESSES. 

9 (a) IN GENERAL.—Section 125 (relating to cafeteria 

10 plans) is amended by redesignating subsections (h) and 

11 (i) as subsections (i) and (j), respectively, and by inserting 

12 after subsection (g) the following new subsection: 

13 ‘‘(h) SIMPLE CAFETERIA PLANS FOR SMALL BUSI14 NESSES.— 

15 ‘‘(1) IN GENERAL.—An eligible employer main16 taining a simple cafeteria plan with respect to which 

17 the requirements of this subsection are met for any 

18 year shall be treated as meeting any applicable non19 discrimination requirement with respect to benefits 

20 provided under the plan during such year. 

21 ‘‘(2) SIMPLE CAFETERIA PLAN.—For purposes 

22 of this subsection, the term ‘simple cafeteria plan’ 

23 means a cafeteria plan— 

24 ‘‘(A) which is established and maintained 

25 by an eligible employer, and 


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1 ‘‘(B) with respect to which the contribution 

2 requirements of paragraph (3), and the eligi3 bility and participation requirements of para4 graph (4), are met. 

5 ‘‘(3) CONTRIBUTIONS REQUIREMENTS.— 

6 ‘‘(A) IN GENERAL.—The requirements of 

7 this paragraph are met if, under the plan— 

8 ‘‘(i) the employer makes matching 

9 contributions on behalf of each employee 

10 who is eligible to participate in the plan 

11 and who is not a highly compensated or 

12 key employee in an amount equal to the 

13 elective plan contributions of the employee 

14 to the plan to the extent the employee’s 

15 elective plan contributions do not exceed 3 

16 percent of the employee’s compensation, or 

17 ‘‘(ii) the employer is required, without 

18 regard to whether an employee makes any 

19 elective plan contribution, to make a con20 tribution to the plan on behalf of each em21 ployee who is not a highly compensated or 

22 key employee and who is eligible to partici23 pate in the plan in an amount equal to at 

24 least 2 percent of the employee’s com25 pensation. 


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1 ‘‘(B) MATCHING CONTRIBUTIONS ON BE2 HALF OF HIGHLY COMPENSATED AND KEY EM3 PLOYEES.—The requirements of subparagraph 

4 (A)(i) shall not be treated as met if, under the 

5 plan, the rate of matching contribution with re6 spect to any elective plan contribution of a 

7 highly compensated or key employee at any rate 

8 of contribution is greater than that with respect 

9 to an employee who is not a highly compensated 

10 or key employee. 

11 ‘‘(C) SPECIAL RULES.— 

12 ‘‘(i) TIME FOR MAKING CONTRIBU13 TIONS.—An employer shall not be treated 

14 as failing to meet the requirements of this 

15 paragraph with respect to any elective plan 

16 contributions of any compensation, or em17 ployer contributions required under this 

18 paragraph with respect to any compensa19 tion, if such contributions are made no 

20 later than the 15th day of the month fol21 lowing the last day of the calendar quarter 

22 which includes the date of payment of the 

23 compensation. 

24 ‘‘(ii) FORM OF CONTRIBUTIONS.—Em25 ployer contributions required under this 


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1 paragraph may be made either to the plan 

2 to provide benefits offered under the plan 

3 or to any person as payment for providing 

4 benefits offered under the plan. 

5 ‘‘(iii) ADDITIONAL CONTRIBUTIONS.— 

6 Subject to subparagraph (B), nothing in 

7 this paragraph shall be treated as prohib8 iting an employer from making contribu9 tions to the plan in addition to contribu10 tions required under subparagraph (A). 

11 ‘‘(D) DEFINITIONS.—For purposes of this 

12 paragraph— 

13 ‘‘(i) ELECTIVE PLAN CONTRIBU14 TION.—The term ‘elective plan contribu15 tion’ means any amount which is contrib16 uted at the election of the employee and 

17 which is not includible in gross income by 

18 reason of this section. 

19 ‘‘(ii) HIGHLY COMPENSATED EM20 PLOYEE.—The term ‘highly compensated 

21 employee’ has the meaning given such term 

22 by section 414(q). 

23 ‘‘(iii) KEY EMPLOYEE.—The term 

24 ‘key employee’ has the meaning given such 

25 term by section 416(i). 


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1 ‘‘(4) MINIMUM ELIGIBILITY AND PARTICIPA2 TION REQUIREMENTS.— 

3 ‘‘(A) IN GENERAL.—The requirements of 

4 this paragraph shall be treated as met with re5 spect to any year if, under the plan— 

6 ‘‘(i) all employees who had at least 

7 1,000 hours of service for the preceding 

8 plan year are eligible to participate, and 

9 ‘‘(ii) each employee eligible to partici10 pate in the plan may, subject to terms and 

11 conditions applicable to all participants, 

12 elect any benefit available under the plan. 

13 ‘‘(B) CERTAIN EMPLOYEES MAY BE EX14 CLUDED.—For purposes of subparagraph 

15 (A)(i), an employer may elect to exclude under 

16 the plan employees— 

17 ‘‘(i) who have less than 1 year of serv18 ice with the employer as of any day during 

19 the plan year, 

20 ‘‘(ii) who have not attained the age of 

21 21 before the close of a plan year, 

22 ‘‘(iii) who are covered under an agree23 ment which the Secretary of Labor finds to 

24 be a collective bargaining agreement if 

25 there is evidence that the benefits covered 


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1 under the cafeteria plan were the subject 

2 of good faith bargaining between employee 

3 representatives and the employer, or 

4 ‘‘(iv) who are described in section 

5 410(b)(3)(C) (relating to nonresident 

6 aliens working outside the United States). 

7 A plan may provide a shorter period of service 

8 or younger age for purposes of clause (i) or (ii). 

9 ‘‘(5) ELIGIBLE EMPLOYER.—For purposes of 

10 this subsection— 

11 ‘‘(A) IN GENERAL.—The term ‘eligible em12 ployer’ means, with respect to any year, any 

13 employer if such employer employed an average 

14 of 100 or fewer employees on business days 

15 during either of the 2 preceding years. For pur16 poses of this subparagraph, a year may only be 

17 taken into account if the employer was in exist18 ence throughout the year. 

19 ‘‘(B) EMPLOYERS NOT IN EXISTENCE DUR20 ING PRECEDING YEAR.—If an employer was not 

21 in existence throughout the preceding year, the 

22 determination under subparagraph (A) shall be 

23 based on the average number of employees that 

24 it is reasonably expected such employer will em25 ploy on business days in the current year. 


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1 ‘‘(C) GROWING EMPLOYERS RETAIN

2 TREATMENT AS SMALL EMPLOYER.—If— 

3 ‘‘(i) an employer was an eligible em4 ployer for any year (a ‘qualified year’), and 

5 ‘‘(ii) such employer establishes a sim6 ple cafeteria plan for its employees for 

7 such year, then, notwithstanding the fact 

8 the employer fails to meet the require9 ments of subparagraph (A) for any subse10 quent year, such employer shall be treated 

11 as an eligible employer for such subsequent 

12 year with respect to employees (whether or 

13 not employees during a qualified year) of 

14 any trade or business which was covered 

15 by the plan during any qualified year. This 

16 subparagraph shall cease to apply if the 

17 employer employs an average of 200 more 

18 employees on business days during any 

19 year preceding any such subsequent year. 

20 ‘‘(D) SPECIAL RULES.— 

21 ‘‘(i) PREDECESSORS.—Any reference 

22 in this paragraph to an employer shall in23 clude a reference to any predecessor of 

24 such employer. 


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1 ‘‘(ii) AGGREGATION RULES.—All per2 sons treated as a single employer under 

3 subsection (a) or (b) of section 52, or sub4 section (n) or (o) of section 414, shall be 

5 treated as one person. 

6 ‘‘(6) APPLICABLE NONDISCRIMINATION RE7 QUIREMENT.—For purposes of this subsection, the 

8 term ‘applicable nondiscrimination requirement’ 

9 means any requirement under subsection (b) of this 

10 section, section 79(d), section 105(h), or paragraph 

11 (2), (3), (4), or (8) of section 129(d). 

12 ‘‘(7) COMPENSATION.—The term ‘compensa13 tion’ has the meaning given such term by section 

14 414(s).’’. 

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

16 this section shall apply to years beginning after December 

17 31, 2006. 

18 SEC. 3. MODIFICATIONS OF RULES APPLICABLE TO CAFE19 TERIA PLANS. 

20 (a) APPLICATION TO SELF-EMPLOYED INDIVID21 UALS.— 

22 (1) IN GENERAL.—Section 125(d) (defining caf23 eteria plan) is amended by adding at the end the fol24 lowing new paragraph: 


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1 ‘‘(3) EMPLOYEE TO INCLUDE SELF-EM2 PLOYED.— 

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

4 includes an individual who is an employee with5 in the meaning of section 401(c)(1) (relating to 

6 self-employed individuals). 

7 ‘‘(B) LIMITATION.—The amount which 

8 may be excluded under subsection (a) with re9 spect to a participant in a cafeteria plan by rea10 son of being an employee under subparagraph 

11 (A) shall not exceed the employee’s earned in12 come (within the meaning of section 401(c)) de13 rived from the trade or business with respect to 

14 which the cafeteria plan is established.’’. 

15 (2) APPLICATION TO BENEFITS WHICH MAY BE

16 PROVIDED UNDER CAFETERIA PLAN.— 

17 (A) GROUP-TERM LIFE INSURANCE.—Sec18 tion 79 (relating to group-term life insurance 

19 provided to employees) is amended by adding at 

20 the end the following new subsection: 

21 ‘‘(f) EMPLOYEE INCLUDES SELF-EMPLOYED.— 

22 ‘‘(1) IN GENERAL.—For purposes of this sec23 tion, the term ‘employee’ includes an individual who 

24 is an employee within the meaning of section 

25 401(c)(1) (relating to self-employed individuals). 


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

2 excluded under the exceptions contained in sub3 section (a) or (b) with respect to an individual treat4 ed as an employee by reason of paragraph (1) shall 

5 not exceed the employee’s earned income (within the 

6 meaning of section 401(c)) derived from the trade or 

7 business with respect to which the individual is so 

8 treated.’’. 

9 (B) ACCIDENT AND HEALTH PLANS.—Sec10 tion 105(g) is amended to read as follows: 

11 ‘‘(g) EMPLOYEE INCLUDES SELF-EMPLOYED.— 

12 ‘‘(1) IN GENERAL.—For purposes of this sec13 tion, the term ‘employee’ includes an individual who 

14 is an employee within the meaning of section 

15 401(c)(1) (relating to self-employed individuals). 

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

17 excluded under this section by reason of subsection 

18 (b) or (c) with respect to an individual treated as an 

19 employee by reason of paragraph (1) shall not ex20 ceed the employee’s earned income (within the mean21 ing of section 401(c)) derived from the trade or 

22 business with respect to which the accident or health 

23 insurance was established.’’. 

24 (C) CONTRIBUTIONS BY EMPLOYERS TO

25 ACCIDENT AND HEALTH PLANS.— 


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1 (i) IN GENERAL.—Section 106, as 

2 amended by subsection (b), is amended by 

3 adding after subsection (b) the following 

4 new subsection: 

5 ‘‘(c) EMPLOYER TO INCLUDE SELF-EMPLOYED.— 

6 ‘‘(1) IN GENERAL.—For purposes of this sec7 tion, the term ‘employee’ includes an individual who 

8 is an employee within the meaning of section 

9 401(c)(1) (relating to self-employed individuals). 

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

11 excluded under subsection (a) with respect to an in12 dividual treated as an employee by reason of para13 graph (1) shall not exceed the employee’s earned in14 come (within the meaning of section 401(c)) derived 

15 from the trade or business with respect to which the 

16 accident or health insurance was established.’’. 

17 (ii) CLARIFICATION OF LIMITATIONS

18 ON OTHER COVERAGE.—The first sentence 

19 of section 162(l)(2)(B) is amended to read 

20 as follows: ‘‘Paragraph (1) shall not apply 

21 to any taxpayer for any calendar month for 

22 which the taxpayer participates in any sub23 sidized health plan maintained by any em24 ployer (other than an employer described 


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1 in section 401(c)(4)) of the taxpayer or the 

2 spouse of the taxpayer.’’. 

3 (b) LONG-TERM CARE INSURANCE PERMITTED TO

4 BE OFFERED UNDER CAFETERIA PLANS AND FLEXIBLE

5 SPENDING ARRANGEMENTS.— 

6 (1) CAFETERIA PLANS.—The last sentence of 

7 section 125(f) (defining qualified benefits) is amend8 ed to read as follows: ‘‘Such term shall include the 

9 payment of premiums for any qualified long-term 

10 care insurance contract (as defined in section 

11 7702B) to the extent the amount of such payment 

12 does not exceed the eligible long-term care premiums 

13 (as defined in section 213(d)(10)) for such con14 tract.’’. 

15 (2) FLEXIBLE SPENDING ARRANGEMENTS.— 

16 Section 106 (relating to contributions by employer to 

17 accident and health plans) is amended by striking 

18 subsection (c). 

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

20 this section shall apply to taxable years beginning after 

21 December 31, 2006. 

22 SEC. 4. MODIFICATION OF RULES APPLICABLE TO FLEXI23 BLE SPENDING ARRANGEMENTS. 

24 (a) MODIFICATION OF RULES.— 


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1 (1) IN GENERAL.—Section 125 of the Internal 

2 Revenue Code of 1986, as amended by section 2, is 

3 amended by redesignating subsections (i) and (j) as 

4 subsections (j) and (k), respectively, and by inserting 

5 after subsection (h) the following new subsection: 

6 ‘‘(i) SPECIAL RULES APPLICABLE TO FLEXIBLE

7 SPENDING ARRANGEMENTS.— 

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

9 a plan or other arrangement shall not fail to be 

10 treated as a flexible spending or similar arrangement 

11 solely because under the plan or arrangement— 

12 ‘‘(A) the amount of the reimbursement for 

13 covered expenses at any time may not exceed 

14 the balance in the participant’s account for the 

15 covered expenses as of such time, 

16 ‘‘(B) except as provided in paragraph 

17 (4)(A)(ii), a participant may elect at any time 

18 specified by the plan or arrangement to make 

19 or modify any election regarding the covered 

20 benefits, or the level of covered benefits, of the 

21 participant under the plan, and 

22 ‘‘(C) a participant is permitted access to 

23 any unused balance in the participant’s ac24 counts under such plan or arrangement in the 

25 manner provided under paragraph (2) or (3). 


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1 ‘‘(2) CARRYOVERS AND ROLLOVERS OF UNUSED

2 BENEFITS IN HEALTH AND DEPENDENT CARE AR3 RANGEMENTS.— 

4 ‘‘(A) IN GENERAL.—A plan or arrange5 ment may permit a participant in a health flexi6 ble spending arrangement or dependent care 

7 flexible spending arrangement to elect— 

8 ‘‘(i) to carry forward any aggregate 

9 unused balances in the participant’s ac10 counts under such arrangement as of the 

11 close of any year to the succeeding year, or 

12 ‘‘(ii) to have such balance transferred 

13 to a plan described in subparagraph (E). 

14 Such carryforward or transfer shall be treated 

15 as having occurred within 30 days of the close 

16 of the year. 

17 ‘‘(B) DOLLAR LIMIT ON

18 CARRYFORWARDS.— 

19 ‘‘(i) IN GENERAL.—The amount which 

20 a participant may elect to carry forward 

21 under subparagraph (A)(i) from any year 

22 shall not exceed $500. For purposes of this 

23 paragraph, all plans and arrangements 

24 maintained by an employer or any related 

25 person shall be treated as 1 plan. 


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1 ‘‘(ii) COST-OF-LIVING ADJUSTMENT.— 

2 In the case of any taxable year beginning 

3 in a calendar year after 2007, the $500 

4 amount under clause (i) shall be increased 

5 by an amount equal to— 

6 ‘‘(I) $500, multiplied by 

7 ‘‘(II) the cost-of-living adjust8 ment determined under section 1(f)(3) 

9 for such calendar year, determined by 

10 substituting ‘2006’ for ‘1992’ in sub11 paragraph (B) thereof. 

12 If any dollar amount as increased under 

13 this clause is not a multiple of $100, such 

14 amount shall be rounded to the next lowest 

15 multiple of $100. 

16 ‘‘(C) EXCLUSION FROM GROSS INCOME.— 

17 No amount shall be required to be included in 

18 gross income under this chapter by reason of 

19 any carryforward or transfer under this para20 graph. 

21 ‘‘(D) COORDINATION WITH LIMITS.— 

22 ‘‘(i) CARRYFORWARDS.—The max23 imum amount which may be contributed to 

24 a health flexible spending arrangement or 

25 dependent care flexible spending arrangeVerDate Aug 31 2005 01:51 Feb 14, 2007 Jkt 059200 PO 00000 Frm 00016 Fmt 6652 Sfmt 6201 E:\BILLS\S555.IS S555

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1 ment for any year to which an unused 

2 amount is carried under this paragraph 

3 shall be reduced by such amount. 

4 ‘‘(ii) ROLLOVERS.—Any amount 

5 transferred under subparagraph (A)(ii) 

6 shall be treated as an eligible rollover 

7 under section 219, 223(f)(5), 401(k), 

8 403(b), or 457, whichever is applicable, ex9 cept that— 

10 ‘‘(I) the amount of the contribu11 tions which a participant may make to 

12 the plan under any such section for 

13 the taxable year including the transfer 

14 shall be reduced by the amount trans15 ferred, and 

16 ‘‘(II) in the case of a transfer to 

17 a plan described in clause (ii) or (iii) 

18 of subparagraph (E), the transferred 

19 amounts shall be treated as elective 

20 deferrals for such taxable year. 

21 ‘‘(E) PLANS.—A plan is described in this 

22 subparagraph if it is— 

23 ‘‘(i) an individual retirement plan, 

24 ‘‘(ii) a qualified cash or deferred ar25 rangement described in section 401(k), 


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1 ‘‘(iii) a plan under which amounts are 

2 contributed by an individual’s employer for 

3 an annuity contract described in section 

4 403(b), 

5 ‘‘(iv) an eligible deferred compensa6 tion plan described in section 457, or 

7 ‘‘(v) a health savings account de8 scribed in section 223. 

9 ‘‘(3) DISTRIBUTION UPON TERMINATION.— 

10 ‘‘(A) IN GENERAL.—A plan or arrange11 ment may permit a participant (or any des12 ignated heir of the participant) to receive a 

13 cash payment equal to the aggregate unused ac14 count balances in the plan or arrangement as of 

15 the date the individual is separated (including 

16 by death or disability) from employment with 

17 the employer maintaining the plan or arrange18 ment. 

19 ‘‘(B) INCLUSION IN INCOME.—Any pay20 ment under subparagraph (A) shall be includ21 ible in gross income for the taxable year in 

22 which such payment is distributed to the em23 ployee. 

24 ‘‘(4) TERMS RELATING TO FLEXIBLE SPENDING

25 ARRANGEMENTS.— 


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1 ‘‘(A) FLEXIBLE SPENDING ARRANGE2 MENTS.— 

3 ‘‘(i) IN GENERAL.—For purposes of 

4 this subsection, a flexible spending ar5 rangement is a benefit program which pro6 vides employees with coverage under which 

7 specified incurred expenses may be reim8 bursed (subject to reimbursement maxi9 mums and other reasonable conditions). 

10 ‘‘(ii) ELECTIONS REQUIRED.—A plan 

11 or arrangement shall not be treated as a 

12 flexible spending arrangement unless a 

13 participant may at least 4 times during 

14 any year make or modify any election re15 garding covered benefits or the level of cov16 ered benefits. 

17 ‘‘(B) HEALTH AND DEPENDENT CARE AR18 RANGEMENTS.—The terms ‘health flexible 

19 spending arrangement’ and ‘dependent care 

20 flexible spending arrangement’ means any flexi21 ble spending arrangement (or portion thereof) 

22 which provides payments for expenses incurred 

23 for medical care (as defined in section 213(d)) 

24 or dependent care (within the meaning of sec25 tion 129), respectively.’’. 


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1 (2) CONFORMING AMENDMENTS.— 

2 (A) The heading for section 125 of the In3 ternal Revenue Code of 1986 is amended by in4 serting ‘‘AND FLEXIBLE SPENDING AR5 RANGEMENTS’’ after ‘‘PLANS’’. 

6 (B) The item relating to section 125 of 

7 such Code in the table of sections for part III 

8 of subchapter B of chapter 1 is amended by in9 serting ‘‘and flexible spending arrangements’’ 

10 after ‘‘plans’’. 

11 (b) TECHNICAL AMENDMENTS.— 

12 (1) Section 106 is amended by striking sub13 section (e) (relating to FSA and HRA Terminations 

14 to Fund HSAs). 

15 (2) Section 223(c)(1)(A)(iii)(II) is amended to 

16 read as follows: 

17 ‘‘(II) the individual is transfer18 ring the entire balance of such ar19 rangement as of the end of the plan 

20 year to a health savings account pur21 suant to section 125(i)(2)(A)(ii), in 

22 accordance with rules prescribed by 

23 the Secretary.’’. 


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

2 this section shall take effect on the date of the enactment 

3 of this Act. 

4 SEC. 5. RULES RELATING TO EMPLOYER-PROVIDED 

5 HEALTH AND DEPENDENT CARE BENEFITS. 

6 (a) HEALTH BENEFITS.—Section 106, as amended 

7 by section 4(b), is amended by adding at the end the fol8 lowing new subsection: 

9 ‘‘(e) LIMITATION ON CONTRIBUTIONS TO HEALTH

10 FLEXIBLE SPENDING ARRANGEMENTS.— 

11 ‘‘(1) IN GENERAL.—Gross income of an em12 ployee for any taxable year shall include employer13 provided coverage provided through 1 or more health 

14 flexible spending arrangements (within the meaning 

15 of section 125(i)) to the extent that the amount oth16 erwise excludable under subsection (a) with regard 

17 to such coverage exceeds the applicable dollar limit 

18 for the taxable year. 

19 ‘‘(2) APPLICABLE DOLLAR LIMIT.—For pur20 poses of this subsection— 

21 ‘‘(A) IN GENERAL.—The applicable dollar 

22 limit for any taxable year is an amount equal 

23 to the sum of— 

24 ‘‘(i) $7,500, plus 


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1 ‘‘(ii) if the arrangement provides cov2 erage for 1 or more individuals in addition 

3 to the employee, an amount equal to one4 third of the amount in effect under clause 

5 (i) (after adjustment under subparagraph 

6 (B)). 

7 ‘‘(B) COST-OF-LIVING ADJUSTMENT.—In 

8 the case of taxable years beginning in any cal9 endar year after 2007, the $7,500 amount 

10 under subparagraph (A) shall be increased by 

11 an amount equal to— 

12 ‘‘(i) $7,500, multiplied by 

13 ‘‘(ii) the cost-of-living adjustment de14 termined under section 1(f)(3) for the cal15 endar year, determined by substituting 

16 ‘2006’ for ‘1992’ in subparagraph (B) 

17 thereof. 

18 If any dollar amount as increased under this 

19 subparagraph is not a multiple of $100, such 

20 dollar amount shall be rounded to the next low21 est multiple of $100.’’. 

22 (b) DEPENDENT CARE.— 

23 (1) EXCLUSION LIMIT.— 

24 (A) IN GENERAL.—Section 129(a)(2) (re25 lating to limitation on exclusion) is amended— 


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1 (i) by striking ‘‘$5,000’’ and inserting 

2 ‘‘the applicable dollar limit’’, and 

3 (ii) by striking ‘‘$2,500’’ and insert4 ing ‘‘one-half of such limit’’. 

5 (B) APPLICABLE DOLLAR LIMIT.—Section 

6 129(a) is amended by adding at the end the fol7 lowing new paragraph: 

8 ‘‘(3) APPLICABLE DOLLAR LIMIT.—For pur9 poses of this subsection— 

10 ‘‘(A) IN GENERAL.—The applicable dollar 

11 limit is $5,000 ($10,000 if dependent care as12 sistance is provided under the program to 2 or 

13 more qualifying individuals of the employee). 

14 ‘‘(B) COST-OF-LIVING ADJUSTMENTS.— 

15 ‘‘(i) $5,000 AMOUNT.—In the case of 

16 taxable years beginning after 2007, the 

17 $5,000 amount under subparagraph (A) 

18 shall be increased by an amount equal to— 

19 ‘‘(I) $5,000, multiplied by 

20 ‘‘(II) the cost-of-living adjust21 ment determined under section 1(f)(3) 

22 for the calendar year in which the tax23 able year begins, determined by sub24 stituting ‘2006’ for ‘1992’ in subpara25 graph (B) thereof. 


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1 If any dollar amount as increased under 

2 this clause is not a multiple of $100, such 

3 dollar amount shall be rounded to the next 

4 lowest multiple of $100. 

5 ‘‘(ii) $10,000 AMOUNT.—The $10,000 

6 amount under subparagraph (A) for tax7 able years beginning after 2005 shall be 

8 increased to an amount equal to twice the 

9 amount the $5,000 amount is increased to 

10 under clause (i).’’. 

11 (2) AVERAGE BENEFITS TEST.— 

12 (A) IN GENERAL.—Section 129(d)(8)(A) 

13 (relating to benefits) is amended— 

14 (i) by striking ‘‘55 percent’’ and in15 serting ‘‘60 percent’’, and 

16 (ii) by striking ‘‘highly compensated 

17 employees’’ the second place it appears and 

18 inserting ‘‘employees receiving benefits’’. 

19 (B) SALARY REDUCTION AGREEMENTS.— 

20 Section 129(d)(8)(B) (relating to salary reduc21 tion agreements) is amended— 

22 (i) by striking ‘‘$25,000’’ and insert23 ing ‘‘$30,000’’, and 

24 (ii) by adding at the end the fol25 lowing: ‘‘In the case of years beginning 


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1 after 2007, the $30,000 amount in the 

2 first sentence shall be adjusted at the same 

3 time, and in the same manner, as the ap4 plicable dollar amount is adjusted under 

5 subsection (a)(3)(B).’’. 

6 (3) PRINCIPAL SHAREHOLDERS OR OWNERS.— 

7 Section 129(d)(4) (relating to principal shareholders 

8 and owners) is amended by adding at the end the 

9 following: ‘‘In the case of any failure to meet the re10 quirements of this paragraph for any year, amounts 

11 shall only be required by reason of the failure to be 

12 included in gross income of the shareholders or own13 ers who are members of the class described in the 

14 preceding sentence.’’. 

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

16 this section shall apply to taxable years beginning after 

17 December 31, 2006. 

Æ 


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