Employers can add a new option to their section 125 cafeteria plan to allow reservists called to active military duty to withdraw unused amounts in their health flexible spending accounts (FSAs).
The HEART Act (Heroes Earnings Assistance and Relief Tax Act of 2008) was enacted last June to permit "qualified reservist distributions" or QRDs in order to allow reservists called to duty to avoid the dreaded "use-it-or-lose-it" rule that applies to FSAs. The IRS recently issued Notice 2008-82 providing some much-needed guidance on how these distributions will work.
Here are some frequently asked questions regarding this change:
Q: Who Is a Qualified Reservist?
A: A Qualified Reservist is a member of the Army National Guard, Army Reserve, Navy Reserve, Marine Corps Reserve, Air National Guard, Air Force Reserve, Coast Guard Reserve, Reserve Corps of the Public Health Service or any additional service listed under the definition of "reserve component" at 101 U.S.C. 37.
Q: What Is A Qualified Reservist Distribution?
A: A QRD is a distribution of all or a portion of the reservist's health FSA account balance if he or she is a member of a reserve component ordered or called to active duty for at least 180 days or for an indefinite period of time. QRDs are an exception to the general rule that a health FSA can only pay for substantiated medical expenses.
Q: When Must It Be Requested?
A: The request for the distribution must be made before the last day of the plan year (or grace period, if the plan has one) in which the order or call to duty was issued. The reservist must provide the employer with a copy of the order or call to active duty.
Q: Who May Receive A QRD?
A: Only an employee who meets the requirements for a QRD is eligible. Spouses and dependent children are not eligible.
Q: How Does The 180-Day Requirement Work?
A: If an employee's active duty period began before June 18, 2008, but continued beyond June 18 and meets the 180-day or indefinite duration requirement, the employee is eligible for a QRD. If the period specified in the order is less than 180 days, a QRD is not allowed. However, if a subsequent order increases the total period of active duty to 180 days or more, a QRD is permitted. For example, if an employee is ordered or called to active duty for 120 days and the order is subsequently extended for an additional 60 days, the employee qualifies for a QRD.
Q: What Amount Is Available As A QRD?
A: The plan should indicate how the amount available as a QRD will be determined. Here are the options:
The entire amount elected for the FSA for the plan year minus reimbursements received as of the date of the QRD request
The amount contributed to the FSA as of the date of the QRD request minus any reimbursements received as of that date
Some other amount not exceeding the entire amount elected for the plan year minus reimbursements.
We expect most employers will select the second option above and, in fact, that option is the default amount if the plan fails to describe how the QRD amount will be determined.
Q: When Will A QRD Be Paid?
A: The QRD must be paid to the employee within a reasonable time but no more than 60 days after it is requested.
Q: Is A QRD Subject To Taxes?
A: Yes. A QRD is included in the employee’s gross income for income and employment tax purposes. The QRD should be reported as wages on Form W-2 for the year it is paid to the employee.
Q: Must Our Section 125 Plan Be Amended?
A: QRDs are optional. A cafeteria plan is not required to provide for QRDs. However, if a company wants to permit QRDs (and many employers desire to do so), the plan must be amended to allow them. While amendments to cafeteria plans generally can only be effective going forward, a QRD amendment may be retroactively effective to permit distributions that are requested between June 18, 2008 (the date the HEART Act was enacted) and the end of 2009, so long as the amendment is made by December 31, 2009.
Q: What Should We Do?
A: Companies that want to add QRDs in order to benefit employees in the reserves who are called to active duty may contact an attorney in the WNJ Employee Benefits Group for an amendment to their cafeteria plan document.