A BILL 
To amend the Internal Revenue Code of 1986 to increase 
participation in medical flexible spending arrangements. 
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Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Medical FSA Improve-
ment Act of 2011’’. 
SEC. 2. ADDITION OF TAXABLE DISTRIBUTIONS. 
(a) TREATMENT OF AMOUNTS EXPENDED FOR MED-
ICAL CARE.—Section 105 of the Internal Revenue Code 
of 1986 (relating to amounts received under accident and 
health plans) is amended by inserting at the end the fol-
lowing new subsection: 
‘‘(k) AMOUNTS PAID UNDER MEDICAL FLEXIBLE 
SPENDING ARRANGEMENTS.— 
‘‘(1) APPLICATION
OF
SUBSECTION (b)
AND 
SECTION 106.—For purposes of subsection (b) and 
section 106, a plan shall not fail to be treated as 
flexible spending arrangement solely because such 
plan, in addition to reimbursing expenses incurred 
for medical care (as defined in subsection (b)) dur-
ing the plan year, distributes for the plan year all 
or a portion of the employee’s balance. 
‘‘(2) LIMITATION.—Paragraph (1) shall apply 
only in the case that the balance under such ar-
rangement for a plan year is distributed after the 
close of the plan year to which the balance relates 
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and not later than the end of the 7th month fol-
lowing the close of such plan year. 
‘‘(3) TAX TREATMENT OF DISTRIBUTION.—Any 
distribution to which paragraph (1) applies shall be 
treated as remuneration of the employee for employ-
ment for the taxable year in which it is distributed. 
‘‘(4) FLEXIBLE
SPENDING
ARRANGEMENT.— 
The term ‘flexible spending arrangement’ means a 
benefit
program
within
the
meaning
of
section 
106(c)(2) (relating to long-term care benefits).’’. 
(b) ADDITIONAL DEFERRED COMPENSATION EXCEP-
TION.—Paragraph (2) of section 125(d) of such Code (re-
lating to deferred compensation under a cafeteria plan) 
is amended by inserting at the end the following new sub-
paragraph: 
‘‘(E) EXCEPTION FOR CERTAIN FLEXIBLE 
SPENDING ARRANGEMENTS.—Subparagraph (A) 
shall not apply to a flexible spending arrange-
ment (within the meaning of section 106(c)(2)) 
as a result of amounts being distributed to the 
covered employee in accordance with section 
105(k).’’. 
(c) CONFORMING AMENDMENT.—Section 409A(d)(1) 
of such Code is amended by striking ‘‘and’’ at the end 
of subparagraph (A), by striking the period at the end 
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of subparagraph (B) and inserting ‘‘, and’’, and by adding 
at the end the following: 
‘‘(C)
a
flexible
spending
arrangement 
which is subject to section 105(k).’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to plan years beginning after De-
cember 31, 2012. 
(e) TRANSITION RULES.—In the case of plan years 
that begin before the date of the enactment of this Act, 
in implementing the amendments made by this section a 
flexible spending arrangement may allow an individual to 
make a new election or to revise an existing election under 
such arrangement so long as such new or revised election 
is made within 90 days after the date of the enactment 
of this Act. 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Health Flexible Spend-
ing Arrangements Improvements Act of 2012’’. 
SEC. 2. TAXABLE DISTRIBUTIONS OF UNUSED BALANCES 
UNDER HEALTH FLEXIBLE SPENDING AR-
RANGEMENTS. 
(a) IN GENERAL.—Section 125 of the Internal Revenue 
Code of 1986 is amended by redesignating subsections (k) 
and (l) as subsections (l) and (m), respectively, and by in-
serting after subsection (j) the following new subsection: 
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‘‘(k) TAXABLE DISTRIBUTIONS OF UNUSED BALANCES 
UNDER HEALTH FLEXIBLE SPENDING ARRANGEMENTS.— 
‘‘(1) IN GENERAL.—For purposes of this section 
and sections 105(b) and 106, a plan or other arrange-
ment which (but for any qualified distribution) would 
be a health flexible spending arrangement shall not 
fail to be treated as a cafeteria plan or health flexible 
spending arrangement (and shall not fail to be treat-
ed as an accident or health plan) merely because such 
arrangement provides for qualified distributions. 
‘‘(2) QUALIFIED DISTRIBUTIONS.—For purposes 
of this subsection, the term ‘qualified distribution’ 
means any distribution to an individual under the 
arrangement referred to in paragraph (1) with re-
spect to any plan year if— 
‘‘(A) such distribution is made after the last 
date on which requests for reimbursement under 
such arrangement for such plan year may be 
made and not later than the end of the 7th 
month following the close of such plan year, and 
‘‘(B) such distribution does not exceed the 
lesser of— 
‘‘(i) $500, or 
‘‘(ii) the excess of— 
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‘‘(I) the salary reduction contribu-
tions made under such arrangement 
for such plan year, over 
‘‘(II) the reimbursements for ex-
penses incurred for medical care made 
under such arrangement for such plan 
year. 
‘‘(3) TAX TREATMENT OF QUALIFIED DISTRIBU-
TIONS.—Qualified distributions shall be includible in 
the gross income of the employee in the taxable year 
in which distributed and shall be taken into account 
as wages or compensation under the applicable provi-
sions of subtitle C when so distributed. 
‘‘(4) COORDINATION WITH QUALIFIED RESERVIST 
DISTRIBUTIONS.—A qualified reservist distribution 
(as defined in subsection (h)(2)) shall not be treated 
as a qualified distribution and shall not be taken into 
account in applying the limitation of paragraph 
(2)(B)(i).’’. 
(b) CONFORMING AMENDMENT.—Paragraph (1) of sec-
tion 409A(d) of such Code is amended by striking ‘‘and’’ 
at the end of subparagraph (A), by striking the period at 
the end of subparagraph (B) and inserting ‘‘, and’’, and 
by adding at the end the following new subparagraph: 
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