• Heroes Earnings Assistance and Relief Tax Act of 2008 - Qualified Reservist Distributions from Health Flexible Spending Accounts
  • November 1, 2008
  • Law Firm: Miller Nash LLP - Portland Office
  • The Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act") was enacted on June 17, 2008. The HEART Act provides benefits for individuals who serve in the uniformed services. This article summarizes a new rule that permits cafeteria plans to make qualified reservist distributions from health flexible spending accounts ("FSAs") of certain eligible reservists.

    General explanation. Under prior law, an employee always forfeited any amounts in a health FSA that were not used to reimburse medical expenses incurred during the plan year (or, if applicable, during the 2½-month grace period after the end of the plan year). This is still the rule for most employees. Under the HEART Act, however, a cafeteria plan may make "qualified reservist distributions" of some or all of the unused balance of a health FSA. As discussed below, qualified reservist distributions may be made only to reservists who are ordered or called to active duty for an indefinite period or for a specified period of at least 180 days.

    This provision of the HEART Act is optional. A cafeteria plan is not required to provide qualified reservist distributions.

    Effective date. This HEART Act provision applies to qualified reservist distributions made after June 17, 2008.

    Plan amendments. If an employer wishes to permit qualified reservist distributions, the cafeteria plan document must be amended to expressly provide for them.

    Generally, cafeteria plans cannot be amended retroactively. Under a special transition rule, however, cafeteria plans may be amended retroactively to permit qualified reservist distributions that are requested on or before December 31, 2009. A retroactive amendment must be adopted by December 31, 2009, and must be effective retroactively to the date of the first qualified reservist distribution made under the plan.

    Who is eligible. A health FSA participant who is a member of a reserve component and is ordered to active duty for an indefinite period or for a specified period of at least 180 days may request a qualified reservist distribution. This includes a health FSA participant who was ordered or called to active duty before June 18, 2008, provided that the period of active duty continued after June 17, 2008, and that the order or call satisfied the duration requirements.

    Qualified reservist distribution requests and distributions.

    • A cafeteria plan may specify a process for qualified reservist distribution requests, and may limit the number of qualified reservist distributions that may be made to a participant during the same plan year.
    • A participant's request for a qualified reservist distribution must be made after receipt of the order or call to active duty, and before the last day of the plan year in which the order or call was received (or, if applicable, before the end of the grace period for that plan year).
    • If a participant requests a qualified reservist distribution, the employer must receive a copy of the order or call to active duty before the distribution can be made. The employer may rely on the order or call in determining whether the participant is eligible for a qualified reservist distribution:
      • If the order or call states that the period of active duty is for an indefinite period, or for a specified period of at least 180 days, the participant is eligible for a qualified reservist distribution, even if the actual period of active duty is less than 180 days.
      • If the order or call states that the period of active duty is for less than 180 days, the participant is not eligible for a qualified reservist distribution. But if a subsequent order or call increases the total period of active duty to 180 days or more, the participant is eligible for a qualified reservist distribution.
    • A qualified reservist distribution must be paid within a reasonable time, but not more than 60 days after the participant's request.

    Amount available for distribution. The cafeteria plan document should specify one of the following options for determining how the amount available for a qualified reservist distribution will be determined:

    • The entire amount elected for the health FSA for the plan year, reduced by the health FSA reimbursements received by the participant as of the date of the qualified reservist distribution request.
    • The amount contributed to the health FSA for the plan year, reduced by the health FSA reimbursements received by the participant as of the date of the qualified reservist distribution request. This is the default rule if the cafeteria plan document does not specify another method.
    • Some other amount, provided that it does not exceed the entire amount elected for the plan year, reduced by reimbursements.

    Medical expense claims for the plan year in which a qualified reservist distribution is made.

    • A cafeteria plan must permit participants to submit health FSA claims for medical expenses incurred before the date of a qualified reservist distribution request, and must pay or reimburse those claims.
    • With respect to medical expenses incurred after the date of a qualified reservist distribution request, a cafeteria plan may either:
      • Permit participants to submit health FSA claims incurred during the remainder of the plan year (and grace period, if applicable); or
      • Terminate the right to submit health FSA claims for the remainder of that period.

    Taxation of qualified reservist distributions. A qualified reservist distribution is includible in the participant's gross income for federal income tax purposes and is subject to federal employment taxes. A qualified reservist distribution must be reported as wages on the participant's W-2 Form for the year in which it is paid.

    Nondiscrimination. If a cafeteria plan makes qualified reservist distributions available, it must make them uniformly available to all plan participants. Amounts distributed as qualified reservist distributions are disregarded in applying the nondiscrimination rules for cafeteria plans.