I
107TH CONGRESS
1ST SESSION
H. R. 3105
To amend the Internal Revenue Code of 1986 to allow amounts elected
for reimbursement of medical care expenses under a health flexible spend-
ing arrangement, as defined in Code Section 106(c)(2) and the regula-
tions promulgated under Section 125, that are unused during a Plan
Year to be carried over within the account to subsequent plan years
for the reimbursement of future eligible medical expenses.
IN THE HOUSE OF REPRESENTATIVES
OCTOBER 11, 2001
Mr. ROYCE 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
amounts elected for reimbursement of medical care ex-
penses under a health flexible spending arrangement,
as defined in Code Section 106(c)(2) and the regulations
promulgated under Section 125, that are unused during
a Plan Year to be carried over within the account to
subsequent plan years for the reimbursement of future
eligible medical expenses.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
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SECTION 1. CARRYOVER OF UNUSED BENEFITS FROM
HEALTH 
FLEXIBLE 
SPENDING 
ARRANGE-
MENTS.
(a) IN GENERAL.—Section 125 of the Internal Rev-
enue Code of 1986 (relating to cafeteria plans) is amended
by redesignating subsections (h) and (i) as subsections (i)
and (j), respectively, and by inserting after subsection (g)
the following new subsection:
‘‘(h) ALLOWANCE
OF CARRYOVERS
OF UNUSED
FUNDS TO SUBSEQUENT TAXABLE YEARS.—
‘‘(1) IN GENERAL.—For purposes of this title—
‘‘(A) a plan or other arrangement shall not
fail to be treated as a cafeteria plan or health
flexible spending arrangement, and
‘‘(B) no amount shall be required to be in-
cluded in gross income by reason of this section
or any other provision of this chapter,
solely because under such plan or other arrangement
any amounts elected for reimbursement of eligible
medical care expenses under a health flexible spend-
ing arrangement which are unused during a plan
year may be carried forward to one or more suc-
ceeding plan years.
‘‘(2) AMOUNTS INCLUDED IN GROSS INCOME.—
Any carryover amount described in subsection (h)(1)
shall be included in gross income for purposes of
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Federal withholding and employment tax purposes,
including FICA taxes. Any amount carried over
under this subparagraph shall be treated as wages
for the taxable year in which the amounts were de-
termined to be carry over amounts as described in
subsection (h)(1).
‘‘(3) TREATMENT
OF
AND
LIMITATION
ON
ROLLOVER AMOUNTS.—Amounts carried over under
subparagraph (h)(1) shall be limited as follows:
‘‘(A) Amounts carried forward pursuant to
subsection (h)(1) shall be limited to $2,000 per
plan year (as indexed for future years by the
cost of living adjustment determined under sec-
tion 1(f)(3)). Any unused amounts during any
plan year in excess of this amount shall be for-
feited and shall be treated in accordance with
the applicable regulations issued under section
125.
‘‘(B) Amounts carried forward pursuant to
subsection (h)(1) shall be used only for reim-
bursement of Qualified Medical Care Expenses
defined in subsection (h)(5) below.
‘‘(C) The employer may invest such carry-
over amounts in guaranteed principle and inter-
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est investments which provide 100 percent li-
quidity within the account.
‘‘(4) FORFEITURES FOR TERMINATING PARTICI-
PANTS
PERMITTED.—Nothing in this subsection
shall preclude the application of the requirement set
forth in the regulations promulgated under section
125 that participants who terminate participation
prior to the end of the plan year must forfeit any
health flexible spending arrangement account bal-
ance provided such amounts do not consist of carry
over amounts described in subsection (h)(1).
‘‘(5) QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
medical expenses’ means, with respect to sub-
section (h)(3) above, amounts paid for medical
care (as defined in section 213(d)) for such in-
dividual, the spouse of such individual, and any
dependent (as defined in section 152) of such
individual, but only to the extent such amounts
are not compensated for by insurance or other-
wise.
‘‘(B) HEALTH INSURANCE EXPENSES.—
‘‘(i) IN GENERAL.—Subparagraph (A)
shall not apply to any payment for cov-
erage under a group health plan of an em-
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ployer of the health flexible spending ar-
rangement participant or the spouse of the
participant.
‘‘(ii) EXCEPTIONS.—Clause (A) shall
not apply to any expense for coverage
under—
‘‘(I) a group health plan during
any period of continuation coverage
required under any Federal law,
‘‘(II) a qualified long-term care
insurance contract (as defined in sec-
tion 7702B(b)),
‘‘(III) a Medicare supplemental
policy under section 1882 of the So-
cial Security Act, or
‘‘(IV) an individual health insur-
ance policy.
‘‘(6) CARRYOVER AMOUNTS TO BE EXPENDED
AFTER HEALTH FLEXIBLE SPENDING ARRANGEMENT
CONTRIBUTION.—All Qualified Medical Care Ex-
penses defined in subsection (h)(5)(A) that are sub-
mitted for reimbursement must be reimbursed first
from amounts in the participant’s health care flexi-
ble spending arrangement that do not constitute car-
ryover amounts described in subsection (h)(1), to the
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extent such amounts may be reimbursed from the
portion of the health flexible spending arrangement
that does not consist of carryover amounts pursuant
to rules set forth in the regulations promulgated
under section 125 relative to health flexible spending
arrangements.
‘‘(7) TREATMENT
OF
CARRYOVER
AMOUNTS
FOLLOWING
TERMINATION
OF
EMPLOYMENT
OR
OTHER LOSS OF ELIGIBILITY.—Upon a termination
of employment or other loss of eligibility under the
health care flexible spending arrangement, the Em-
ployer must provide for one or more of the following
methods of distribution of a Participant’s accumu-
lated carryover amount plus interest earned and al-
located to such Participant pursuant to subsection
(h)(3)(C):
‘‘(A) The Participant’s accumulated carry-
over amount, including any interest earned and
allocated to such health care spending arrange-
ment balance pursuant to (h)(3)(C), may be re-
tained by the Employer to be used to reimburse
Qualifying Medical Care Expenses of the former
participant and the former employee’s spouse or
dependents incurred after the date of termi-
nation;
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of employment or loss of eligibility. Should no elec-
tion be made, the funds will revert to the employer
consistent with Federal regulations. If the termi-
nation of employment or loss of eligibility is a result
of the participant’s death, the surviving spouse, or
dependents, if no surviving spouse, will receive the
participant’s carry over funds in a manner con-
sistent with (h)(7)(C).’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
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