Title: Fair FSAs Act of 2020
Policy area: Taxation

Summary:
Fair FSAs Act of 2020
This bill requires employers to allow employees who separate from employment to elect to receive a distribution from their health flexible spending arrangement. It also allows employees to roll over existing balances attributable to a reduction in expected elective health care expenses in the plan year due to the outbreak of COVID-19 (i.e., coronavirus disease 2019).

[Congressional Bills 116th Congress]
[From the U.S. Government Publishing Office]
[S. 4371 Introduced in Senate (IS)]

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116th CONGRESS
  2d Session
                                S. 4371

To amend the Internal Revenue Code of 1986 to require employers to cash 
   out the flexible spending accounts of employees who separate from 
                  employment, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             July 30, 2020

 Ms. Smith (for herself and Ms. Sinema) 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 require employers to cash 
   out the flexible spending accounts of employees who separate from 
                  employment, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Fair FSAs Act of 2020''.

SEC. 2. CASH-OUTS OF FLEXIBLE SPENDING ACCOUNTS.

    (a) In General.--Subsection (h) of section 125 of the Internal 
Revenue Code of 1986 is amended to read as follows:
    ``(h) Special Rules for Unused Benefits in Health Flexible Spending 
Arrangements.--
            ``(1) Distributions upon termination of employment.--
                    ``(A) In general.--If a benefit is provided under a 
                cafeteria plan through employer contributions to a 
                health flexible spending arrangement--
                            ``(i) such plan or arrangement shall not 
                        fail to be treated as a cafeteria plan or 
                        health flexible spending arrangement (and shall 
                        not fail to be treated as an accident or health 
                        plan) for purposes of this title merely because 
                        such arrangement provides for an election 
                        meeting the requirements of subparagraph (B), 
                        and
                            ``(ii) such benefit shall not be treated as 
                        a qualified benefit for purposes of this 
                        section unless such arrangement provides for 
                        such election.
                    ``(B) Election.--The requirements of this 
                subparagraph are met if the health flexible spending 
                arrangement provides that, if the employee terminates 
                employment with the employer (whether voluntarily or 
                involuntarily) during the plan year, the employee may 
                elect to receive in cash an amount equal to--
                            ``(i) the excess, if any, of--
                                    ``(I) all contributions made to the 
                                arrangement for such plan year as of 
                                the date the employee terminates 
                                employment with the employer, over
                                    ``(II) the amount of reimbursements 
                                received by the employee under such 
                                arrangement during such plan year as of 
                                the date the employee ceases to be a 
                                participant in the arrangement 
                                (including any grace period), reduced 
                                by
                            ``(ii) the amount of tax withheld under 
                        subparagraph (C).
                    ``(C) Deduction of tax.--In paying to an employee 
                the cash payment elected under subparagraph (B), the 
                employer shall deduct and withhold from the employee an 
                amount equal to--
                            ``(i) the taxes which the employer would 
                        have been required to deduct and withhold if 
                        the employee had received the equivalent amount 
                        of wages instead of having made salary 
                        reduction contributions to the health flexible 
                        spending arrangement, and
                            ``(ii) in the case of a cash payment of any 
                        employer contributions to the health flexible 
                        spending arrangement, the taxes which the 
                        employer would have been required to deduct and 
                        withhold if the employee had received the 
                        equivalent amount of wages in lieu of such 
                        contributions,
                determined as if the employee had received such wages 
                on the date the cash payment is made. The amount of tax 
                so deducted and withheld shall be remitted by the 
                employer in the same manner as amounts collected under 
                section 3102.
            ``(2) Qualified reservist distributions.--
                    ``(A) In general.--For purposes of this title, a 
                plan or other arrangement shall not fail to be treated 
                as a cafeteria plan or health flexible spending 
                arrangement (and shall not fail to be treated as an 
                accident or health plan) merely because such 
                arrangement provides for qualified reservist 
                distributions.
                    ``(B) Qualified reservist distribution.--For 
                purposes of this paragraph, the term `qualified 
                reservist distribution' means any distribution to an 
                individual of all or a portion of the balance in the 
                employee's account under such arrangement if--
                            ``(i) such individual was (by reason of 
                        being a member of a reserve component (as 
                        defined in section 101 of title 37, United 
                        States Code)) ordered or called to active duty 
                        for a period in excess of 179 days or for an 
                        indefinite period, and
                            ``(ii) such distribution is made during the 
                        period beginning on the date of such order or 
                        call and ending on the last date that 
                        reimbursements could otherwise be made under 
                        such arrangement for the plan year which 
                        includes the date of such order or call.''.
    (b) Treatment as Accident or Health Plan.--Section 106 of the 
Internal Revenue Code of 1986 is amended by adding at the end the 
following new subsection:
    ``(h) Distributions Upon Termination of Employment.--A plan shall 
not fail to be treated as a health flexible spending arrangement under 
this section or section 105 merely because such plan provides for an 
election meeting the requirements of section 125(h)(1)(B).''.
    (c) Excise Tax on Failure To Provide Distributions Upon Termination 
of Employment.--
            (1) In general.--Chapter 43 of the Internal Revenue Code of 
        1986 is amended by inserting after section 4980 the following 
        new section:

``SEC. 4980A. FAILURE TO PROVIDE DISTRIBUTIONS FROM HEALTH FLEXIBLE 
              SPENDING ARRANGEMENTS UPON TERMINATION OF EMPLOYMENT.

    ``(a) General Rule.--There is hereby imposed a tax on the failure 
of a covered cafeteria plan to meet the requirements of section 
125(h)(1) (including a failure to withhold and remit any tax as 
required by subparagraph (C) thereof) with respect to any employee.
    ``(b) Amount of Tax.--
            ``(1) In general.--The amount of the tax imposed by 
        subsection (a) on any failure with respect to an employee shall 
        be $100 for each day in the noncompliance period with respect 
        to such failure.
            ``(2) Noncompliance period.--For purposes of this section, 
        the term `noncompliance period' means, with respect to any 
        failure, the period--
                    ``(A) beginning on the date such failure first 
                occurs, and
                    ``(B) ending on the earlier of--
                            ``(i) the date such failure is corrected, 
                        or
                            ``(ii) the date which is 6 months after the 
                        date the employee terminates employment with 
                        the employer.
            ``(3) Limitations.--Rules similar to the rules of 
        subsections (b)(3) and (c) of section 4980B shall apply with 
        respect to the tax under this section.
    ``(c) Covered Cafeteria Plan.--For purposes of this section, the 
term `covered cafeteria plan' means a cafeteria plan (as defined in 
section 125(d)) under which a benefit is provided through employer 
contributions to a health flexible spending arrangement.
    ``(d) Liability for Tax.--Rules similar to the rules of section 
4980B(e) shall apply for purposes of determining liability for the tax 
imposed under this section.''.
            (2) Clerical amendment.--The table of sections for chapter 
        43 of such Code is amended by inserting after the item relating 
        to section 4980 the following new item:

``Sec. 4980A. Failure to provide distributions from health flexible 
                            spending arrangements upon termination of 
                            employment.''.
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to plan years beginning after the date of the enactment 
        of this Act.
            (2) Plan amendments.--A plan or arrangement shall not be 
        treated as violating the requirements of section 125(h)(1) of 
        the Internal Revenue Code of 1986, as added by this section 
        (including for purposes of section 4980A of such Code, as so 
        added), if--
                    (A) the plan or arrangement is amended to meet such 
                requirements on or before the last day of the first 
                plan year beginning after the date of the enactment of 
                this Act,
                    (B) such amendment applies retroactively to the 
                first day of such first plan year, and
                    (C) the plan or arrangement operates in accordance 
                with such requirements as of the first day of such 
                first plan year.
        A plan or arrangement shall not be treated as failing to 
        satisfy any requirement of the Internal Revenue Code of 1986 
        merely because the plan or arrangement operates as provided in 
        subparagraph (C).

SEC. 3. EXTENSION OF TIME FOR FILING FSA CLAIMS.

    (a) In General.--Notwithstanding any applicable rule or regulation 
under section 125 of the Internal Revenue Code of 1986, a plan or other 
arrangement shall not fail to be treated as a cafeteria plan or health 
flexible spending arrangement merely because such arrangement permits 
participants who make the certification under subsection (b) to carry 
over any amount of unused benefit or contribution (without limitation) 
from any plan year beginning or ending in 2020 to the subsequent plan 
year.
    (b) Certification by Employee.--In applying for any carryover 
permitted pursuant to subsection (a), the employee shall certify that 
the amount to be carried over is attributable to a reduction in 
expected elective health care expenses in the plan year due to the 
outbreak of coronavirus disease 2019 (COVID-19) in the United States.
    (c) Definitions.--Any term used in this section which is also used 
in section 106 or 125 of the Internal Revenue Code of 1986 or the rules 
or regulations thereunder shall have the same meaning as when used in 
such section or regulations.
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