I 
108TH CONGRESS 
1ST SESSION 
H. R. 176
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 that are unused during a plan year to be carried 
over for such use for subsequent plan years. 
IN THE HOUSE OF REPRESENTATIVES 
JANUARY 7, 2003
Mr. ROYCE (for himself and Mr. KENNEDY of Minnesota) 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 that 
are unused during a plan year to be carried over for 
such use for subsequent plan years.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
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 paragraph (1) 
shall be included in gross income for purposes of 
subtitle and subtitle B (relating to withholding and 
employment taxes). Any such carryover shall be 
treated as wages for the taxable year from which the 
amount was carried.
‘‘(3) TREATMENT
OF
AND
LIMITATION
ON 
ROLLOVER AMOUNTS.—Amounts carried over under 
paragraph (1) shall be limited as follows: 
‘‘(A) Amounts carried forward pursuant to 
paragraph (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 
paragraph (1) shall be used only for reimburse-
ment of qualified medical care expenses (as de-
fined in paragraph (5)). 
‘‘(C) The employer may invest such carry-
over amounts in guaranteed principal and inter-
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 paragraph (1). 
‘‘(5) QUALIFIED MEDICAL EXPENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified 
medical expenses’ means amounts paid for med-
ical care (as defined in section 213(d)) for such 
individual, 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 otherwise.
‘‘(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-
ployer of the health flexible spending ar-
rangement participant or the spouse of the 
participant.
‘‘(ii) EXCEPTIONS.—Clause (i) 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 expenses 
that are submitted for reimbursement must be reim-
bursed first from amounts in the participant’s health 
care flexible spending arrangement that do not con-
stitute carryover amounts described in paragraph 
(1), to the extent such amounts may be reimbursed 
from the portion of the health flexible spending ar-
rangement that does not consist of carryover 
amounts pursuant to rules set forth in the regula-
tions 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 paragraph 
(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 paragraph (3)(C), 
may be retained by the employer to be used to 
reimburse qualifying medical care expenses of 
the former participant and the former employ-
ee’s spouse or dependents incurred after the 
date of termination; 
‘‘(B) The carryover amount calculated as 
of the day of the termination of employment or 
other loss of eligibility may be transferred to 
the subsequent employer to be used by the 
former participant in a manner consistent with 
the rule of this subsection, provided the subse-
quent employer provides a similar arrangement 
and agrees in writing; or 
‘‘(C) The employer may distribute the car-
ryover amount, including any interest earned 
and allocated to such account pursuant to para-
graph (3)(C), to any appropriate vehicle as de-
fined by the Department of Treasury in regula-
tions or to the participant in cash. If carryover 
amounts are received in cash, the interest 
earned and allocated to such participant pursu-
ant to paragraph (3)(C) shall be treated as or-
dinary income for purposes of this subtitle. 
The employer must offer at least one of the options 
set forth above; however, nothing in this subsection 
requires the employer to offer more than one option. 
If the employer offers more than one of the options 
listed above, the employee must choose the applica-
ble option within 60 days of the date of termination 
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 paragraph (7)(C).’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
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