Title VII, SEC. 7201. LIMITATION ON EXCLUSION FOR EMPLOYER-PROVIDED HEALTH BENEFITS. (a) General Rule. Section 106 (relating to contributions by employer to accident and health plans) is amended to read as follows: ``SEC. 106. CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND HEALTH PLANS. ``(a) General Rule. Except as otherwise provided in this section, gross income of an employee does not include employer-provided coverage under an accident or health plan. ``(b) Inclusion of Certain Benefits Not Part of Comprehensive Benefit Package. ``(1) In general. Effective on and after January 1, 2003, gross income of an employee shall include employer-provided coverage under any accident or health plan except to the extent that ``(A) such coverage consists of comprehensive health coverage described in section 1101 of the Health Security Act, or ``(B) such coverage consists of permitted coverage. ``(2) Permitted coverage. For purposes of this subsection, the term `permitted coverage' means ``(A) any coverage providing wages or payments in lieu of wages for any period during which the employee is absent from work on account of sickness or injury, ``(B) any coverage providing for payments referred to in section 105(c), ``(C) any coverage provided to an employee or former employee after such employee has attained age 65, unless such coverage is provided by reason of the current employment of the individual (within the meaning of section 1862(b)(1)(A)(i)(I) of the Social Security Act) with the employer providing the coverage, ``(D) any coverage under a qualified long-term care insurance policy (as defined in section 7702B), ``(E) any coverage provided under Federal law to any individual (or spouse or dependent thereof) by reason of such individual being ``(i) a member of the Armed Forces of the United States, or ``(ii) a veteran, and ``(F) any other coverage to the extent that the Secretary determines that the continuation of an exclusion for such coverage is not inconsistent with the purposes of this subsection. ``(3) Special rules for flexible spending arrangements. ``(A) In general. To the extent that any employer-provided coverage is provided through a flexible spending or similar arrangement, paragraph (1) shall be applied by substituting `January 1, 1997,' for `January 1, 2003'. ``(B) Flexible spending arrangement. For purposes of this paragraph, a flexible spending arrangement is a benefit program which provides employees with coverage under which ``(i) specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and ``(ii) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 200 percent of the value of such coverage. ``In the case of an insured plan, the maximum amount reasonably available shall be determined on the basis of the underlying coverage. ``(c) Special Rules for Determining Amount of Inclusion. ``(1) In general. For purposes of this section, the value of any coverage shall be determined on the basis of the average cost of providing such coverage to the beneficiaries receiving such coverage. ``(2) Special rule. To the extent provided by the Secretary, cost determinations under paragraph (1) may be made on the basis of reasonable estimates. ``(d) Potential Cash Payment Not To Affect Exclusion. No amount shall be included in the gross income of an employee solely because the employee may select coverage under an accident or health plan which results in a cash payment referred to in section 1607 of the Health Security Act.'' (b) Employment Tax Treatment. (1) Social security tax. (A) Subsection (a) of section 3121 is amended by inserting after paragraph (21) the following new sentence: ``Nothing in paragraph (2) shall exclude from the term `wages' any amount which is required to be included in gross income under section 106(b).'' (B) Subsection (a) of section 209 of the Social Security Act is amended by inserting after paragraph (21) the following new sentence: ``Nothing in paragraph (2) shall exclude from the term `wages' any amount which is required to be included in gross income under section 106(b) of the Internal Revenue Code of 1986.'' (2) Railroad retirement tax. Paragraph (1) of section 3231(e) is amended by adding at the end thereof the following new sentence: ``Nothing in clause (i) of the second sentence of this paragraph shall exclude from the term `compensation' any amount which is required to be included in gross income under section 106(b).'' (3) Unemployment tax. Subsection (b) of section 3306 is amended by inserting after paragraph (16) the following new sentence: ``Nothing in paragraph (2) shall exclude from the term `wages' any amount which is required to be included in gross income under section 106(b).'' (4) Wage withholding. Subsection (a) of section 3401 is amended by adding at the end thereof the following new sentence: ``Nothing in the preceding provisions of this subsection shall exclude from the term `wages' any amount which is required to be included in gross income under section 106(b).'' (c) Effective Date. The amendments made by this section shall take effect on January 1, 1997.