I

107TH CONGRESS

1ST SESSION H. R. 167

To amend the Internal Revenue Code of 1986 to allow unused benefits

from cafeteria plans to be carried over into later years and used for

health care reimbursement rollover accounts and certain other plans,

arrangements, or accounts.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 3, 2001

Mr. ROYCE (for himself and Mr. DREIER) 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 unused benefits from cafeteria plans to be carried over

into later years and used for health care reimbursement

rollover accounts and certain other plans, arrangements,

or accounts.

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 CAFETERIA PLANS AND FLEXIBLE SPENDING

5 ARRANGEMENTS.

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 BEN5 EFITS TO LATER 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 flexible

9 spending or similar 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 nontaxable benefit which is unused as of the

15 close of a taxable year may be carried forward to 1

16 or more succeeding taxable years.

17 ‘‘(2) LIMITATION.—Paragraph (1) shall not

18 apply to amounts carried from a plan to the extent

19 such amounts exceed $3,000 (applied on an annual

20 basis). For purposes of this paragraph, all plans and

21 arrangements maintained by an employer or any re22 lated person shall be treated as 1 plan.

23 ‘‘(3) ALLOWANCE OF ROLLOVER.—

24 ‘‘(A) IN GENERAL.—Each flexible spending

25 or similar arrangement which permits a carry-
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1 over under paragraph (1) of an amount of un2 used benefit shall provide that each participant

3 may elect, in lieu of a carryover of such

4 amount, to have such amount distributed to the

5 participant.

6 ‘‘(B) AMOUNTS NOT INCLUDED IN IN7 COME.—Any distribution under subparagraph

8 (A) shall not be included in gross income to the

9 extent that such amount is transferred in a

10 trustee-to-trustee transfer, or is contributed

11 within 60 days of the date of the distribution,

12 to—

13 ‘‘(i) an individual retirement plan,

14 ‘‘(ii) a qualified cash or deferred ar15 rangement described in section 401(k),

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

17 contributed by an individual’s employer for

18 an annuity contract described in section

19 403(b),

20 ‘‘(iv) an eligible deferred compensa21 tion plan described in section 457,

22 ‘‘(v) an Archer MSA (within the

23 meaning of section 220),
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1 ‘‘(vi) an education individual retire2 ment account (within the meaning of sec3 tion 530(b)), or

4 ‘‘(vii) a health care reimbursement

5 rollover account described in section 530A.

6 Any amount rolled over under this subpara7 graph shall be treated as a rollover contribution

8 for the taxable year from which the unused

9 amount would otherwise be carried.

10 ‘‘(C) TREATMENT OF ROLLOVER.—Any

11 amount rolled over under subparagraph (B)

12 shall be treated as an eligible rollover under

13 section 219, 220, 401(k), 403(b), 457, 530, or

14 530A, whichever is applicable, and shall not be

15 taken into account in applying any limitation

16 (or participation requirement) on contributions

17 under such section or any other provision of

18 this chapter for the taxable year of the rollover.

19 ‘‘(4) COST-OF-LIVING ADJUSTMENT.—In the

20 case of any taxable year beginning in a calendar

21 year after 2001, the $3,000 amount under para22 graph (2) shall be adjusted at the same time and in

23 the same manner as under section 415(d)(2), except

24 that the base period taken into account shall be the

25 calendar quarter beginning October 1, 2001, and
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1 any increase which is not a multiple of $50 shall be

2 rounded to the next lowest multiple of $50.’’

3 (b) HEALTH CARE REIMBURSEMENT ROLLOVER AC4 COUNT.—Subchapter F of chapter 1 of subtitle A of the

5 Internal Revenue Code of 1986 is amended by adding at

6 the end the following:

7 ‘‘PART IX—HEALTH CARE REIMBURSEMENT

8 ROLLOVER ACCOUNTS

‘‘Sec. 530A. Health care reimbursement rollover accounts.

9 ‘‘SEC. 530A. HEALTH CARE REIMBURSEMENT ROLLOVER

10 ACCOUNTS.

11 ‘‘(a) GENERAL RULE.—A health care reimbursement

12 rollover account shall be exempt from taxation under this

13 subtitle unless such account has ceased to be a health care

14 reimbursement rollover account. Notwithstanding the pre15 ceding sentence, any such account is subject to the taxes

16 imposed by section 511 (relating to imposition of tax on

17 unrelated business income of charitable, etc. organiza18 tions).

19 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur20 poses of this section—

21 ‘‘(1) HEALTH CARE REIMBURSEMENT ROLL22 OVER ACCOUNT.—The term ‘health care reimburse23 ment rollover account’ means a trust created or or24 ganized in the United States exclusively for the pur-
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1 pose of paying the qualified medical expenses of the

2 account holder, but only if the written governing in3 strument creating the trust meets the following re4 quirements:

5 ‘‘(A) No contribution will be accepted un6 less it is a rollover contribution allowed under

7 section 125(h)(3).

8 ‘‘(B) The trustee is a bank (as defined in

9 section 408(n)), an insurance company (as de10 fined in section 816), or another person (includ11 ing the employer of the account holder) who

12 demonstrates to the satisfaction of the Sec13 retary that the manner in which such person

14 will administer the trust will be consistent with

15 the requirements of this section.

16 ‘‘(C) The assets of the trust will be in17 vested only in appropriate guaranteed principle

18 and interest investments which provide 100 per19 cent liquidity.

20 ‘‘(D) Contributions to the trust will not be

21 invested until the second year after the year the

22 contributions are made.

23 ‘‘(E) The interest of an individual in the

24 balance in his account is nonforfeitable.

25 ‘‘(2) QUALIFIED MEDICAL EXPENSES.—
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1 ‘‘(A) IN GENERAL.—The term ‘qualified

2 medical expenses’ means, with respect to an ac3 count holder, amounts paid by such holder for

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

5 such individual, the spouse of such individual,

6 and any dependent (as defined in section 152)

7 of such individual, but only to the extent such

8 amounts are not compensated for by insurance

9 or otherwise.

10 ‘‘(B) HEALTH INSURANCE MAY NOT BE

11 PURCHASED FROM ACCOUNT.—

12 ‘‘(i) IN GENERAL.—Subparagraph (A)

13 shall not apply to any payment for cov14 erage under a group health plan of an em15 ployer of the account holder or the spouse

16 of the account holder.

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

18 not apply to any expense for coverage

19 under—

20 ‘‘(I) a health plan during any pe21 riod of continuation coverage required

22 under any Federal law,

23 ‘‘(II) a qualified long-term care

24 insurance contract (as defined in sec25 tion 7702B(b)), or
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1 ‘‘(III) a medicare supplemental

2 policy under section 1882 of the So3 cial Security Act.

4 ‘‘(3) ACCOUNT HOLDER.—The term ‘account

5 holder’ means the individual on whose behalf the

6 health care reimbursement rollover account was es7 tablished.

8 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar

9 to rules under section 408(h) (relating to custodial

10 accounts) shall apply for purposes of this section.

11 ‘‘(c) TAX TREATMENT OF ACCOUNT TERMI12 NATIONS.—Rules similar to the rules of paragraphs (2)

13 and (4) of section 408(e) shall apply to health care reim14 bursement rollover accounts and any amount treated as

15 distributed under such rules shall be treated as not used

16 to pay qualified medical expenses.

17 ‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—

18 ‘‘(1) AMOUNTS USED FOR QUALIFIED MEDICAL

19 EXPENSES.—Any amount paid or distributed out of

20 a health care reimbursement rollover account which

21 is used exclusively to pay qualified medical expenses

22 of any account holder shall not be includible in gross

23 income.

24 ‘‘(2) INCLUSION OF AMOUNTS NOT USED FOR

25 QUALIFIED MEDICAL EXPENSES.—Any amount paid
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1 or distributed out of a health care reimbursement

2 rollover account which is not used exclusively to pay

3 the qualified medical expenses of the account holder

4 shall be included in the gross income of such holder.

5 ‘‘(3) COORDINATION WITH MEDICAL EXPENSE

6 DEDUCTION.—For purposes of determining the

7 amount of the deduction under section 213 or

8 162(l), any payment or distribution out of a health

9 care reimbursement rollover account for qualified

10 medical expenses shall not be treated as an expense

11 paid for medical care.

12 ‘‘(4) TRANSFER OF ACCOUNT INCIDENT TO DI13 VORCE.—The transfer of an individual’s interest in

14 a health care reimbursement rollover account to an

15 individual’s spouse or former spouse under a divorce

16 or separation instrument described in subparagraph

17 (A) of section 71(b)(2) shall not be considered a tax18 able transfer made by such individual notwith19 standing any other provision of this subtitle, and

20 such interest shall, after such transfer, be treated as

21 a health care reimbursement rollover account with

22 respect to which such spouse is the account holder.

23 ‘‘(5) TREATMENT AFTER DEATH OF ACCOUNT

24 HOLDER.—
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1 ‘‘(A) EXCLUSION FROM ESTATE TAX.—The

2 value of the gross estate under chapter 11 shall

3 be determined without regard to the value of

4 health care reimbursement rollover account.

5 ‘‘(B) TRANSFER OF ACCOUNT TO DES6 IGNATED BENEFICIARY.—If any individual ac7 quires the account holder’s interest in a health

8 care reimbursement rollover account by reason

9 of being the designated beneficiary of such ac10 count at the death of such account holder, such

11 account shall be treated as if the beneficiary

12 were the account holder.

13 ‘‘(C) SPECIAL RULE.—If any person other

14 than an individual acquires the account holder’s

15 interest in a health care reimbursement rollover

16 account by reason of being the designated bene17 ficiary of such account at the death of such ac18 count holder, such account shall cease to be a

19 health care reimbursement rollover account as

20 of the date of death.

21 ‘‘(e) REPORTS.—The Secretary may require the

22 trustee of a health care reimbursement rollover account

23 to make such reports regarding such account to the Sec24 retary and to the account holder with respect to contribu25 tions, distributions, and such other matters as the Sec-
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1 retary determines appropriate. The reports required by

2 this subsection shall be filed at such time and in such

3 manner and furnished to such individuals at such time and

4 in such manner as may be required by the Secretary.’’.

5 (c) CLERICAL AMENDMENT.—The table of parts for

6 subchapter F of chapter 1 of such Code is amended by

7 adding at the end the following new item:

‘‘Part IX. Health care reimbursement rollover accounts.’’

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

9 this section shall apply to taxable years beginning after

10 December 31, 2001.

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