SIMPLE Cafeteria Plan Act of 2005 - Amends the Internal Revenue Code to establish a new employee benefit cafeteria plan to be known as a Simple Cafeteria Plan. Defines "Simple Cafeteria Plan" as a cafeteria plan which: (1) is established and maintained by an employer with an average of 100 or fewer employees during a two-year period; (2) requires employers to make contributions or match employee contributions to the plan; (3) requires participating employees to have at least 1,000 hours of service for the preceding plan year and allows such employees to elect any benefit available under the plan; (4) permits participation by self-employed individuals; and (5) includes long-term care insurance as a qualified benefit. Exempts employers who make contributions for employees under a simple cafeteria plans from pension plan nondiscrimination requirements applicable to highly compensated and key employees.
Modifies rules applicable to employee benefit flexible spending arrangements, including health and dependent care arrangements, to permit participants to make or modify elections regarding covered benefits and to carry over up to $500 (indexed for inflation) of unused benefits to the succeeding year or transfer such unused amounts to another plan, including an individual retirement plan or a health savings account.
Allows an exclusion from the gross income of an employee of up to $7,500 ($10,000 for employees with one or more dependents) for employer contributions to a flexible spending arrangement. Provides for a cost-of-living adjustment to such exclusion amounts beginning in calendar year 2006.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 723 Introduced in Senate (IS)]
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.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) Short Title.--This Act may be cited as the ``SIMPLE Cafeteria
Plan Act of 2005''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
SEC. 2. ESTABLISHMENT OF SIMPLE CAFETERIA PLANS FOR SMALL BUSINESSES.
(a) In General.--Section 125 (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) Simple Cafeteria Plans for Small Businesses.--
``(1) In general.--An eligible employer maintaining a
simple cafeteria plan with respect to which the requirements of
this subsection are met for any year shall be treated as
meeting any applicable nondiscrimination requirement with
respect to benefits provided under the plan during such year.
``(2) Simple cafeteria plan.--For purposes of this
subsection, the term `simple cafeteria plan' means a cafeteria
plan--
``(A) which is established and maintained by an
eligible employer, and
``(B) with respect to which the contribution
requirements of paragraph (3), and the eligibility and
participation requirements of paragraph (4), are met.
``(3) Contributions requirements.--
``(A) In general.--The requirements of this
paragraph are met if, under the plan--
``(i) the employer makes matching
contributions on behalf of each employee who is
eligible to participate in the plan and who is
not a highly compensated or key employee in an
amount equal to the elective plan contributions
of the employee to the plan to the extent the
employee's elective plan contributions do not
exceed 3 percent of the employee's
compensation, or
``(ii) the employer is required, without
regard to whether an employee makes any
elective plan contribution, to make a
contribution to the plan on behalf of each
employee who is not a highly compensated or key
employee and who is eligible to participate in
the plan in an amount equal to at least 2
percent of the employee's compensation.
``(B) Matching contributions on behalf of highly
compensated and key employees.--The requirements of
subparagraph (A)(i) shall not be treated as met if,
under the plan, the rate of matching contribution with
respect to any elective plan contribution of a highly
compensated or key employee at any rate of contribution
is greater than that with respect to an employee who is
not a highly compensated or key employee.
``(C) Special rules.--
``(i) Time for making contributions.--An
employer shall not be treated as failing to
meet the requirements of this paragraph with
respect to any elective plan contributions of
any compensation, or employer contributions
required under this paragraph with respect to
any compensation, if such contributions are
made no later than the 15th day of the month
following the last day of the calendar quarter
which includes the date of payment of the
compensation.
``(ii) Form of contributions.--Employer
contributions required under this paragraph may
be made either to the plan to provide benefits
offered under the plan or to any person as
payment for providing benefits offered under
the plan.
``(iii) Additional contributions.--Subject
to subparagraph (B), nothing in this paragraph
shall be treated as prohibiting an employer
from making contributions to the plan in
addition to contributions required under
subparagraph (A).
``(D) Definitions.--For purposes of this
paragraph--
``(i) Elective plan contribution.--The term
`elective plan contribution' means any amount
which is contributed at the election of the
employee and which is not includible in gross
income by reason of this section.
``(ii) Highly compensated employee.--The
term `highly compensated employee' has the
meaning given such term by section 414(q).
``(iii) Key employee.--The term `key
employee' has the meaning given such term by
section 416(i).
``(4) Minimum eligibility and participation requirements.--
``(A) In general.--The requirements of this
paragraph shall be treated as met with respect to any
year if, under the plan--
``(i) all employees who had at least 1,000
hours of service for the preceding plan year
are eligible to participate, and
``(ii) each employee eligible to
participate in the plan may, subject to terms
and conditions applicable to all participants,
elect any benefit available under the plan.
``(B) Certain employees may be excluded.--For
purposes of subparagraph (A)(i), an employer may elect
to exclude under the plan employees--
``(i) who have less than 1 year of service
with the employer as of any day during the plan
year,
``(ii) who have not attained the age of 21
before the close of a plan year,
``(iii) who are covered under an agreement
which the Secretary of Labor finds to be a
collective bargaining agreement if there is
evidence that the benefits covered under the
cafeteria plan were the subject of good faith
bargaining between employee representatives and
the employer, or
``(iv) who are described in section
410(b)(3)(C) (relating to nonresident aliens
working outside the United States).
A plan may provide a shorter period of service or
younger age for purposes of clause (i) or (ii).
``(5) Eligible employer.--For purposes of this subsection--
``(A) In general.--The term `eligible employer'
means, with respect to any year, any employer if such
employer employed an average of 100 or fewer employees
on business days during either of the 2 preceding
years. For purposes of this subparagraph, a year may
only be taken into account if the employer was in
existence throughout the year.
``(B) Employers not in existence during preceding
year.--If an employer was not in existence throughout
the preceding year, the determination under
subparagraph (A) shall be based on the average number
of employees that it is reasonably expected such
employer will employ on business days in the current
year.
``(C) Growing employers retain treatment as small
employer.--If--
``(i) an employer was an eligible employer
for any year (a `qualified year'), and
``(ii) such employer establishes a simple
cafeteria plan for its employees for such year,
then, notwithstanding the fact the employer
fails to meet the requirements of subparagraph
(A) for any subsequent year, such employer
shall be treated as an eligible employer for
such subsequent year with respect to employees
(whether or not employees during a qualified
year) of any trade or business which was
covered by the plan during any qualified year.
This subparagraph shall cease to apply if the
employer employs an average of 200 more
employees on business days during any year
preceding any such subsequent year.
``(D) Special rules.--The rules of section
220(c)(4)(D) shall apply for purposes of this
paragraph.
``(6) Applicable nondiscrimination requirement.--For
purposes of this subsection, the term `applicable
nondiscrimination requirement' means any requirement under
subsection (b) of this section, section 79(d), section 105(h),
or paragraph (2), (3), (4), or (8) of section 129(d).
``(7) Compensation.--The term `compensation' has the
meaning given such term by section 414(s).''
(b) Effective Date.--The amendments made by this section shall
apply to years beginning after December 31, 2004.
SEC. 3. MODIFICATIONS OF RULES APPLICABLE TO CAFETERIA PLANS.
(a) Application to Self-Employed Individuals.--
(1) In general.--Section 125(d) (defining cafeteria plan)
is amended by adding at the end the following new paragraph:
``(3) Employee to include self-employed.--
``(A) In general.--The term `employee' includes an
individual who is an employee within the meaning of
section 401(c)(1) (relating to self-employed
individuals).
``(B) Limitation.--The amount which may be excluded
under subsection (a) with respect to a participant in a
cafeteria plan by reason of being an employee under
subparagraph (A) shall not exceed the employee's earned
income (within the meaning of section 401(c)) derived
from the trade or business with respect to which the
cafeteria plan is established.''
(2) Application to benefits which may be provided under
cafeteria plan.--
(A) Group-term life insurance.--Section 79
(relating to group-term life insurance provided to
employees) is amended by adding at the end the
following new subsection:
``(f) Employee Includes Self-Employed.--
``(1) In general.--For purposes of this section, the term
`employee' includes an individual who is an employee within the
meaning of section 401(c)(1) (relating to self-employed
individuals).
``(2) Limitation.--The amount which may be excluded under
the exceptions contained in subsection (a) or (b) with respect
to an individual treated as an employee by reason of paragraph
(1) shall not exceed the employee's earned income (within the
meaning of section 401(c)) derived from the trade or business
with respect to which the individual is so treated.''
(B) Accident and health plans.--Section 105(g) is
amended to read as follows:
``(g) Employee Includes Self-Employed.--
``(1) In general.--For purposes of this section, the term
`employee' includes an individual who is an employee within the
meaning of section 401(c)(1) (relating to self-employed
individuals).
``(2) Limitation.--The amount which may be excluded under
this section by reason of subsection (b) or (c) with respect to
an individual treated as an employee by reason of paragraph (1)
shall not exceed the employee's earned income (within the
meaning of section 401(c)) derived from the trade or business
with respect to which the accident or health insurance was
established.''
(C) Contributions by employers to accident and
health plans.--
(i) In general.--Section 106, as amended by
subsection (b), is amended by adding after
subsection (b) the following new subsection:
``(c) Employer to Include Self-Employed.--
``(1) In general.--For purposes of this section, the term
`employee' includes an individual who is an employee within the
meaning of section 401(c)(1) (relating to self-employed
individuals).
``(2) Limitation.--The amount which may be excluded under
subsection (a) with respect to an individual treated as an
employee by reason of paragraph (1) shall not exceed the
employee's earned income (within the meaning of section 401(c))
derived from the trade or business with respect to which the
accident or health insurance was established.''
(ii) Clarification of limitations on other
coverage.--The first sentence of section 162(l)(2)(B)
is amended to read as follows: ``Paragraph (1) shall
not apply to any taxpayer for any calendar month for
which the taxpayer participates in any subsidized
health plan maintained by any employer (other than an
employer described in section 401(c)(4)) of the
taxpayer or the spouse of the taxpayer.
(b) Long-Term Care Insurance Permitted to Be Offered Under
Cafeteria Plans and Flexible Spending Arrangements.--
(1) Cafeteria plans.--The last sentence of section 125(f)
(defining qualified benefits) is amended to read as follows:
``Such term shall include the payment of premiums for any
qualified long-term care insurance contract (as defined in
section 7702B) to the extent the amount of such payment does
not exceed the eligible long-term care premiums (as defined in
section 213(d)(10)) for such contract''.
(2) Flexible spending arrangements.--Section 106 (relating
to contributions by employer to accident and health plans) is
amended by striking subsection (c).
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2004.
SEC. 4. MODIFICATION OF RULES APPLICABLE TO FLEXIBLE SPENDING
ARRANGEMENTS.
(a) In General.--Section 125, as amended by section 2, is amended
by redesignating subsections (i) and (j) as subsections (j) and (k),
respectively, and by inserting after subsection (h) the following new
subsection:
``(i) Special Rules Applicable to Flexible Spending Arrangements.--
``(1) In general.--For purposes of this title, a plan or
other arrangement shall not fail to be treated as a flexible
spending or similar arrangement solely because under the plan
or arrangement--
``(A) the amount of the reimbursement for covered
expenses at any time may not exceed the balance in the
participant's account for the covered expenses as of
such time,
``(B) except as provided in paragraph (4)(A)(ii), a
participant may elect at any time specified by the plan
or arrangement to make or modify any election regarding
the covered benefits, or the level of covered benefits,
of the participant under the plan, and
``(C) a participant is permitted access to any
unused balance in the participant's accounts under such
plan or arrangement in the manner provided under
paragraph (2) or (3).
``(2) Carryovers and rollovers of unused benefits in health
and dependent care arrangements.--
``(A) In general.--A plan or arrangement may permit
a participant in a health flexible spending arrangement
or dependent care flexible spending arrangement to
elect--
``(i) to carry forward any aggregate unused
balances in the participant's accounts under
such arrangement as of the close of any year to
the succeeding year, or
``(ii) to have such balance transferred to
a plan described in subparagraph (E).
Such carryforward or transfer shall be treated as
having occurred within 30 days of the close of the
year.
``(B) Dollar limit on carryforwards.--
``(i) In general.--The amount which a
participant may elect to carry forward under
subparagraph (A)(i) from any year shall not
exceed $500. For purposes of this paragraph,
all plans and arrangements maintained by an
employer or any related person shall be treated
as 1 plan.
``(ii) Cost-of-living adjustment.--In the
case of any taxable year beginning in a
calendar year after 2005, the $500 amount under
clause (i) shall be increased by an amount
equal to--
``(I) $500, multiplied by
``(II) the cost-of-living
adjustment determined under section
1(f)(3) for such calendar year,
determined by substituting `2004' for
`1992' in subparagraph (B) thereof.
If any dollar amount as increased under this
clause is not a multiple of $100, such amount
shall be rounded to the next lowest multiple of
$100.
``(C) Exclusion from gross income.--No amount shall
be required to be included in gross income under this
chapter by reason of any carryforward or transfer under
this paragraph.
``(D) Coordination with limits.--
``(i) Carryforwards.--The maximum amount
which may be contributed to a health flexible
spending arrangement or dependent care flexible
spending arrangement for any year to which an
unused amount is carried under this paragraph
shall be reduced by such amount.
``(ii) Rollovers.--Any amount transferred
under subparagraph (A)(ii) shall be treated as
an eligible rollover under section 219,
223(f)(5), 401(k), 403(b), or 457, whichever is
applicable, except that--
``(I) the amount of the
contributions which a participant may
make to the plan under any such section
for the taxable year including the
transfer shall be reduced by the amount
transferred, and
``(II) in the case of a transfer to
a plan described in clause (ii) or
(iii) of subparagraph (E), the
transferred amounts shall be treated as
elective deferrals for such taxable
year.
``(E) Plans.--A plan is described in this
subparagraph if it is--
``(i) an individual retirement plan,
``(ii) a qualified cash or deferred
arrangement described in section 401(k),
``(iii) a plan under which amounts are
contributed by an individual's employer for an
annuity contract described in section 403(b),
``(iv) an eligible deferred compensation
plan described in section 457, or
``(v) a health savings account described in
section 223.
``(3) Distribution upon termination.--
``(A) In general.--A plan or arrangement may permit
a participant (or any designated heir of the
participant) to receive a cash payment equal to the
aggregate unused account balances in the plan or
arrangement as of the date the individual is separated
(including by death or disability) from employment with
the employer maintaining the plan or arrangement.
``(B) Inclusion in income.--Any payment under
subparagraph (A) shall be includible in gross income
for the taxable year in which such payment is
distributed to the employee.
``(4) Terms relating to flexible spending arrangements.--
``(A) Flexible spending arrangements.--
``(i) In general.--For purposes of this
subsection, a flexible spending arrangement is
a benefit program which provides employees with
coverage under which specified incurred
expenses may be reimbursed (subject to
reimbursement maximums and other reasonable
conditions).
``(ii) Elections required.--A plan or
arrangement shall not be treated as a flexible
spending arrangement unless a participant may
at least 4 times during any year make or modify
any election regarding covered benefits or the
level of covered benefits.
``(B) Health and dependent care arrangements.--The
terms `health flexible spending arrangement' and
`dependent care flexible spending arrangement' means
any flexible spending arrangement (or portion thereof)
which provides payments for expenses incurred for
medical care (as defined in section 213(d)) or
dependent care (within the meaning of section 129),
respectively.''
(b) Conforming Amendment.--
(1) The heading for section 125 is amended by inserting
``and flexible spending arrangements'' after ``plans''.
(2) The item relating to section 125 in the table of
sections for part III of subchapter B of chapter 1 is amended
by inserting ``and flexible spending arrangements'' after
``plans''.
(c) Effective Date.--The amendments made by this section shall
apply to years beginning after December 31, 2004.
SEC. 5. RULES RELATING TO EMPLOYER-PROVIDED HEALTH AND DEPENDENT CARE
BENEFITS.
(a) Health Benefits.--Section 106, as amended by section 3, is
amended by adding at the end the following new subsection:
``(e) Limitation on Contributions to Health Flexible Spending
Arrangements.--
``(1) In general.--Gross income of an employee for any
taxable year shall include employer-provided coverage provided
through 1 or more health flexible spending arrangements (within
the meaning of section 125(i)) to the extent that the amount
otherwise excludable under subsection (a) with regard to such
coverage exceeds the applicable dollar limit for the taxable
year.
``(2) Applicable dollar limit.--For purposes of this
subsection--
``(A) In general.--The applicable dollar limit for
any taxable year is an amount equal to the sum of--
``(i) $7,500, plus
``(ii) if the arrangement provides coverage
for 1 or more individuals in addition to the
employee, an amount equal to one-third of the
amount in effect under clause (i) (after
adjustment under subparagraph (B)).
``(B) Cost-of-living adjustment.--In the case of
taxable years beginning in any calendar year after
2005, the $7,500 amount under subparagraph (A) shall be
increased by an amount equal to--
``(i) $7,500, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year, determined by substituting
`2004' for `1992' in subparagraph (B) thereof.
If any dollar amount as increased under this
subparagraph is not a multiple of $100, such dollar
amount shall be rounded to the next lowest multiple of
$100.''
(b) Dependent Care.--
(1) Exclusion limit.--
(A) In general.--Section 129(a)(2) (relating to
limitation on exclusion) is amended--
(i) by striking ``$5,000'' and inserting
``the applicable dollar limit'', and
(ii) by striking ``$2,500'' and inserting
``one-half of such limit''.
(B) Applicable dollar limit.--Section 129(a) is
amended by adding at the end the following new
paragraph:
``(3) Applicable dollar limit.--For purposes of this
subsection--
``(A) In general.--The applicable dollar limit is
$5,000 ($10,000 if dependent care assistance is
provided under the program to 2 or more qualifying
individuals of the employee).
``(B) Cost-of-living adjustments.--
``(i) $5,000 amount.--In the case of
taxable years beginning after 2005, the $5,000
amount under subparagraph (A) shall be
increased by an amount equal to--
``(I) $5,000, multiplied by
``(II) the cost-of-living
adjustment determined under section
1(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `2004' for `1992' in
subparagraph (B) thereof.
If any dollar amount as increased under this
clause is not a multiple of $100, such dollar
amount shall be rounded to the next lowest
multiple of $100.
``(ii) $10,000 amount.--The $10,000 amount
under subparagraph (A) for taxable years
beginning after 2005 shall be increased to an
amount equal to twice the amount the $5,000
amount is increased to under clause (i).''
(2) Average benefits test.--
(A) In general.--Section 129(d)(8)(A) (relating to
benefits) is amended--
(i) by striking ``55 percent'' and
inserting ``60 percent'', and
(ii) by striking ``highly compensated
employees'' the second place it appears and
inserting ``employees receiving benefits''.
(B) Salary reduction agreements.--Section
129(d)(8)(B) (relating to salary reduction agreements)
is amended--
(i) by striking ``$25,000'' and inserting
``$30,000'', and
(ii) by adding at the end the following:
``In the case of years beginning after 2005,
the $30,000 amount in the first sentence shall
be adjusted at the same time, and in the same
manner, as the applicable dollar amount is
adjusted under subsection (a)(3)(B).''
(3) Principal shareholders or owners.--Section 129(d)(4)
(relating to principal shareholders and owners) is amended by
adding at the end the following: ``In the case of any failure
to meet the requirements of this paragraph for any year,
amounts shall only be required by reason of the failure to be
included in gross income of the shareholders or owners who are
members of the class described in the preceding sentence.''
(c) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2004.
<all>
Introduced in Senate
Sponsor introductory remarks on measure. (CR S3290-3291)
Read twice and referred to the Committee on Finance. (text of measure as introduced: CR S3291-3294)
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