II 

109TH CONGRESS 

1ST SESSION S. 723 

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 

APRIL 6, 2005 

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 2005’’. 
2 

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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 
3 

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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. 
4 

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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 
5 

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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). 
6 

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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 
7 

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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. 
8 

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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.—The rules of sec21 tion 220(c)(4)(D) shall apply for purposes of 

22 this paragraph. 

23 ‘‘(6) APPLICABLE NONDISCRIMINATION RE24 QUIREMENT.—For purposes of this subsection, the 

25 term ‘applicable nondiscrimination requirement’ 
9 

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1 means any requirement under subsection (b) of this 

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

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

4 ‘‘(7) COMPENSATION.—The term ‘compensa5 tion’ has the meaning given such term by section 

6 414(s).’’ 

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

8 this section shall apply to years beginning after December 

9 31, 2004. 

10 SEC. 3. MODIFICATIONS OF RULES APPLICABLE TO CAFE11 TERIA PLANS. 

12 (a) APPLICATION TO SELF-EMPLOYED INDIVID13 UALS.— 

14 (1) IN GENERAL.—Section 125(d) (defining caf15 eteria plan) is amended by adding at the end the fol16 lowing new paragraph: 

17 ‘‘(3) EMPLOYEE TO INCLUDE SELF-EM18 PLOYED.— 

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

20 includes an individual who is an employee with21 in the meaning of section 401(c)(1) (relating to 

22 self-employed individuals). 

23 ‘‘(B) LIMITATION.—The amount which 

24 may be excluded under subsection (a) with re25 spect to a participant in a cafeteria plan by rea-
10 

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1 son of being an employee under subparagraph 

2 (A) shall not exceed the employee’s earned in3 come (within the meaning of section 401(c)) de4 rived from the trade or business with respect to 

5 which the cafeteria plan is established.’’ 

6 (2) APPLICATION TO BENEFITS WHICH MAY BE

7 PROVIDED UNDER CAFETERIA PLAN.— 

8 (A) GROUP-TERM LIFE INSURANCE.—Sec9 tion 79 (relating to group-term life insurance 

10 provided to employees) is amended by adding at 

11 the end the following new subsection: 

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

13 ‘‘(1) IN GENERAL.—For purposes of this sec14 tion, the term ‘employee’ includes an individual who 

15 is an employee within the meaning of section 

16 401(c)(1) (relating to self-employed individuals). 

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

18 excluded under the exceptions contained in sub19 section (a) or (b) with respect to an individual treat20 ed as an employee by reason of paragraph (1) shall 

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

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

23 business with respect to which the individual is so 

24 treated.’’ 
11 

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1 (B) ACCIDENT AND HEALTH PLANS.—Sec2 tion 105(g) is amended to read as follows: 

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

4 ‘‘(1) IN GENERAL.—For purposes of this sec5 tion, the term ‘employee’ includes an individual who 

6 is an employee within the meaning of section 

7 401(c)(1) (relating to self-employed individuals). 

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

9 excluded under this section by reason of subsection 

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

11 employee by reason of paragraph (1) shall not ex12 ceed the employee’s earned income (within the mean13 ing of section 401(c)) derived from the trade or 

14 business with respect to which the accident or health 

15 insurance was established.’’ 

16 (C) CONTRIBUTIONS BY EMPLOYERS TO

17 ACCIDENT AND HEALTH PLANS.— 

18 (i) IN GENERAL.—Section 106, as 

19 amended by subsection (b), is amended by 

20 adding after subsection (b) the following 

21 new subsection: 

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

23 ‘‘(1) IN GENERAL.—For purposes of this sec24 tion, the term ‘employee’ includes an individual who 
12 

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1 is an employee within the meaning of section 

2 401(c)(1) (relating to self-employed individuals). 

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

4 excluded under subsection (a) with respect to an in5 dividual treated as an employee by reason of para6 graph (1) shall not exceed the employee’s earned in7 come (within the meaning of section 401(c)) derived 

8 from the trade or business with respect to which the 

9 accident or health insurance was established.’’ 

10 (ii) CLARIFICATION OF LIMITATIONS ON

11 OTHER COVERAGE.—The first sentence of sec12 tion 162(l)(2)(B) is amended to read as follows: 

13 ‘‘Paragraph (1) shall not apply to any taxpayer 

14 for any calendar month for which the taxpayer 

15 participates in any subsidized health plan main16 tained by any employer (other than an employer 

17 described in section 401(c)(4)) of the taxpayer 

18 or the spouse of the taxpayer. 

19 (b) LONG-TERM CARE INSURANCE PERMITTED TO

20 BE OFFERED UNDER CAFETERIA PLANS AND FLEXIBLE

21 SPENDING ARRANGEMENTS.— 

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

23 section 125(f) (defining qualified benefits) is amend24 ed to read as follows: ‘‘Such term shall include the 

25 payment of premiums for any qualified long-term 
13 

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1 care insurance contract (as defined in section 

2 7702B) to the extent the amount of such payment 

3 does not exceed the eligible long-term care premiums 

4 (as defined in section 213(d)(10)) for such con5 tract’’. 

6 (2) FLEXIBLE SPENDING ARRANGEMENTS.— 

7 Section 106 (relating to contributions by employer to 

8 accident and health plans) is amended by striking 

9 subsection (c). 

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

11 this section shall apply to taxable years beginning after 

12 December 31, 2004. 

13 SEC. 4. MODIFICATION OF RULES APPLICABLE TO FLEXI14 BLE SPENDING ARRANGEMENTS. 

15 (a) IN GENERAL.—Section 125, as amended by sec16 tion 2, is amended by redesignating subsections (i) and 

17 (j) as subsections (j) and (k), respectively, and by insert18 ing after subsection (h) the following new subsection: 

19 ‘‘(i) SPECIAL RULES APPLICABLE TO FLEXIBLE

20 SPENDING ARRANGEMENTS.— 

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

22 a plan or other arrangement shall not fail to be 

23 treated as a flexible spending or similar arrangement 

24 solely because under the plan or arrangement— 
14 

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

2 covered expenses at any time may not exceed 

3 the balance in the participant’s account for the 

4 covered expenses as of such time, 

5 ‘‘(B) except as provided in paragraph 

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

7 specified by the plan or arrangement to make 

8 or modify any election regarding the covered 

9 benefits, or the level of covered benefits, of the 

10 participant under the plan, and 

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

12 any unused balance in the participant’s ac13 counts under such plan or arrangement in the 

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

15 ‘‘(2) CARRYOVERS AND ROLLOVERS OF UNUSED

16 BENEFITS IN HEALTH AND DEPENDENT CARE AR17 RANGEMENTS.— 

18 ‘‘(A) IN GENERAL.—A plan or arrange19 ment may permit a participant in a health flexi20 ble spending arrangement or dependent care 

21 flexible spending arrangement to elect— 

22 ‘‘(i) to carry forward any aggregate 

23 unused balances in the participant’s ac24 counts under such arrangement as of the 

25 close of any year to the succeeding year, or 
15 

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1 ‘‘(ii) to have such balance transferred 

2 to a plan described in subparagraph (E). 

3 Such carryforward or transfer shall be treated 

4 as having occurred within 30 days of the close 

5 of the year. 

6 ‘‘(B) DOLLAR LIMIT ON

7 CARRYFORWARDS.— 

8 ‘‘(i) IN GENERAL.—The amount which 

9 a participant may elect to carry forward 

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

11 shall not exceed $500. For purposes of this 

12 paragraph, all plans and arrangements 

13 maintained by an employer or any related 

14 person shall be treated as 1 plan. 

15 ‘‘(ii) COST-OF-LIVING ADJUSTMENT.— 

16 In the case of any taxable year beginning 

17 in a calendar year after 2005, the $500 

18 amount under clause (i) shall be increased 

19 by an amount equal to— 

20 ‘‘(I) $500, multiplied by 

21 ‘‘(II) the cost-of-living adjust22 ment determined under section 1(f)(3) 

23 for such calendar year, determined by 

24 substituting ‘2004’ for ‘1992’ in sub25 paragraph (B) thereof. 
16 

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1 If any dollar amount as increased under 

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

3 amount shall be rounded to the next lowest 

4 multiple of $100. 

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

6 No amount shall be required to be included in 

7 gross income under this chapter by reason of 

8 any carryforward or transfer under this para9 graph. 

10 ‘‘(D) COORDINATION WITH LIMITS.— 

11 ‘‘(i) CARRYFORWARDS.—The max12 imum amount which may be contributed to 

13 a health flexible spending arrangement or 

14 dependent care flexible spending arrange15 ment for any year to which an unused 

16 amount is carried under this paragraph 

17 shall be reduced by such amount. 

18 ‘‘(ii) ROLLOVERS.—Any amount 

19 transferred under subparagraph (A)(ii) 

20 shall be treated as an eligible rollover 

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

22 403(b), or 457, whichever is applicable, ex23 cept that— 

24 ‘‘(I) the amount of the contribu25 tions which a participant may make to 
17 

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1 the plan under any such section for 

2 the taxable year including the transfer 

3 shall be reduced by the amount trans4 ferred, and 

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

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

7 of subparagraph (E), the transferred 

8 amounts shall be treated as elective 

9 deferrals for such taxable year. 

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

11 subparagraph if it is— 

12 ‘‘(i) an individual retirement plan, 

13 ‘‘(ii) a qualified cash or deferred ar14 rangement described in section 401(k), 

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

16 contributed by an individual’s employer for 

17 an annuity contract described in section 

18 403(b), 

19 ‘‘(iv) an eligible deferred compensa20 tion plan described in section 457, or 

21 ‘‘(v) a health savings account de22 scribed in section 223. 

23 ‘‘(3) DISTRIBUTION UPON TERMINATION.— 

24 ‘‘(A) IN GENERAL.—A plan or arrange25 ment may permit a participant (or any des-
18 

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1 ignated heir of the participant) to receive a 

2 cash payment equal to the aggregate unused ac3 count balances in the plan or arrangement as of 

4 the date the individual is separated (including 

5 by death or disability) from employment with 

6 the employer maintaining the plan or arrange7 ment. 

8 ‘‘(B) INCLUSION IN INCOME.—Any pay9 ment under subparagraph (A) shall be includ10 ible in gross income for the taxable year in 

11 which such payment is distributed to the em12 ployee. 

13 ‘‘(4) TERMS RELATING TO FLEXIBLE SPENDING

14 ARRANGEMENTS.— 

15 ‘‘(A) FLEXIBLE SPENDING ARRANGE16 MENTS.— 

17 ‘‘(i) IN GENERAL.—For purposes of 

18 this subsection, a flexible spending ar19 rangement is a benefit program which pro20 vides employees with coverage under which 

21 specified incurred expenses may be reim22 bursed (subject to reimbursement maxi23 mums and other reasonable conditions). 

24 ‘‘(ii) ELECTIONS REQUIRED.—A plan 

25 or arrangement shall not be treated as a 
19 

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1 flexible spending arrangement unless a 

2 participant may at least 4 times during 

3 any year make or modify any election re4 garding covered benefits or the level of cov5 ered benefits. 

6 ‘‘(B) HEALTH AND DEPENDENT CARE AR7 RANGEMENTS.—The terms ‘health flexible 

8 spending arrangement’ and ‘dependent care 

9 flexible spending arrangement’ means any flexi10 ble spending arrangement (or portion thereof) 

11 which provides payments for expenses incurred 

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

13 or dependent care (within the meaning of sec14 tion 129), respectively.’’ 

15 (b) CONFORMING AMENDMENT.— 

16 (1) The heading for section 125 is amended by 

17 inserting ‘‘AND FLEXIBLE SPENDING ARRANGE18 MENTS’’ after ‘‘PLANS’’. 

19 (2) The item relating to section 125 in the table 

20 of sections for part III of subchapter B of chapter 

21 1 is amended by inserting ‘‘and flexible spending ar22 rangements’’ after ‘‘plans’’. 

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

24 this section shall apply to years beginning after December 

25 31, 2004. 
20 

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1 SEC. 5. RULES RELATING TO EMPLOYER-PROVIDED 

2 HEALTH AND DEPENDENT CARE BENEFITS. 

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

4 by section 3, is amended by adding at the end the fol5 lowing new subsection: 

6 ‘‘(e) LIMITATION ON CONTRIBUTIONS TO HEALTH

7 FLEXIBLE SPENDING ARRANGEMENTS.— 

8 ‘‘(1) IN GENERAL.—Gross income of an em9 ployee for any taxable year shall include employer10 provided coverage provided through 1 or more health 

11 flexible spending arrangements (within the meaning 

12 of section 125(i)) to the extent that the amount oth13 erwise excludable under subsection (a) with regard 

14 to such coverage exceeds the applicable dollar limit 

15 for the taxable year. 

16 ‘‘(2) APPLICABLE DOLLAR LIMIT.—For pur17 poses of this subsection— 

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

19 limit for any taxable year is an amount equal 

20 to the sum of— 

21 ‘‘(i) $7,500, plus 

22 ‘‘(ii) if the arrangement provides cov23 erage for 1 or more individuals in addition 

24 to the employee, an amount equal to one25 third of the amount in effect under clause 
21 

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1 (i) (after adjustment under subparagraph 

2 (B)). 

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

4 the case of taxable years beginning in any cal5 endar year after 2005, the $7,500 amount 

6 under subparagraph (A) shall be increased by 

7 an amount equal to— 

8 ‘‘(i) $7,500, multiplied by 

9 ‘‘(ii) the cost-of-living adjustment de10 termined under section 1(f)(3) for the cal11 endar year, determined by substituting 

12 ‘2004’ for ‘1992’ in subparagraph (B) 

13 thereof. 

14 If any dollar amount as increased under this 

15 subparagraph is not a multiple of $100, such 

16 dollar amount shall be rounded to the next low17 est multiple of $100.’’ 

18 (b) DEPENDENT CARE.— 

19 (1) EXCLUSION LIMIT.— 

20 (A) IN GENERAL.—Section 129(a)(2) (re21 lating to limitation on exclusion) is amended— 

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

23 ‘‘the applicable dollar limit’’, and 

24 (ii) by striking ‘‘$2,500’’ and insert25 ing ‘‘one-half of such limit’’. 
22 

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1 (B) APPLICABLE DOLLAR LIMIT.—Section 

2 129(a) is amended by adding at the end the fol3 lowing new paragraph: 

4 ‘‘(3) APPLICABLE DOLLAR LIMIT.—For pur5 poses of this subsection— 

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

7 limit is $5,000 ($10,000 if dependent care as8 sistance is provided under the program to 2 or 

9 more qualifying individuals of the employee). 

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

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

12 taxable years beginning after 2005, the 

13 $5,000 amount under subparagraph (A) 

14 shall be increased by an amount equal to— 

15 ‘‘(I) $5,000, multiplied by 

16 ‘‘(II) the cost-of-living adjust17 ment determined under section 1(f)(3) 

18 for the calendar year in which the tax19 able year begins, determined by sub20 stituting ‘2004’ for ‘1992’ in subpara21 graph (B) thereof. 

22 If any dollar amount as increased under 

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

24 dollar amount shall be rounded to the next 

25 lowest multiple of $100. 
23 

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1 ‘‘(ii) $10,000 AMOUNT.—The $10,000 

2 amount under subparagraph (A) for tax3 able years beginning after 2005 shall be 

4 increased to an amount equal to twice the 

5 amount the $5,000 amount is increased to 

6 under clause (i).’’ 

7 (2) AVERAGE BENEFITS TEST.— 

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

9 (relating to benefits) is amended— 

10 (i) by striking ‘‘55 percent’’ and in11 serting ‘‘60 percent’’, and 

12 (ii) by striking ‘‘highly compensated 

13 employees’’ the second place it appears and 

14 inserting ‘‘employees receiving benefits’’. 

15 (B) SALARY REDUCTION AGREEMENTS.— 

16 Section 129(d)(8)(B) (relating to salary reduc17 tion agreements) is amended— 

18 (i) by striking ‘‘$25,000’’ and insert19 ing ‘‘$30,000’’, and 

20 (ii) by adding at the end the fol21 lowing: ‘‘In the case of years beginning 

22 after 2005, the $30,000 amount in the 

23 first sentence shall be adjusted at the same 

24 time, and in the same manner, as the ap-
24 

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1 plicable dollar amount is adjusted under 

2 subsection (a)(3)(B).’’ 

3 (3) PRINCIPAL SHAREHOLDERS OR OWNERS.— 

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

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

6 following: ‘‘In the case of any failure to meet the re7 quirements of this paragraph for any year, amounts 

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

9 included in gross income of the shareholders or own10 ers who are members of the class described in the 

11 preceding sentence.’’ 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2004. 

Æ