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PrintOct 10, 2008
Earlier this year, the Heroes Earnings Assistance and Relief Tax Act (HEART Act) of 2008 became law. The HEART Act was designed to provide much-needed financial flexibility for our military. In its first guidance on the HEART Act, the IRS has released Notice 2008-82 which discusses Qualified Reservist Distributions (QRDs). QRDs provide certain military reservists with special options in their health care flexible spending accounts, but employer action is necessary to enable the process. This article explains the IRS guidance.
On September 29, 2008, the Internal Revenue Service (IRS) released Notice 2008-82 which provides guidance on new Internal Revenue Code Section 125(h). The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) added special provisions, including the right to take immediate distributions from health flexible spending accounts (health FSAs), for reservists ordered or called to active duty. These distributions, made on or after June 18 2008, are called Qualified Reservists Distributions or QRDs. In this article, we discuss the guidance in Notice 2008-82.
Eligibility
Any employee who is ordered or called to active duty for a period of 180 days or more because he or she is a member of a reservist unit may request a QRD. Any employee called to active duty before June 18, 2008 and whose period of active duty continues after June 18, 2008 may request a QRD if the period of active duty meets the duration requirements. The right to receive a QRD only applies to the employee who is called to active duty. It does not apply to an employee because another family member is called to active duty.
An employee may request a QRD on or after the date of the order or call to active duty and before the last day of the plan year (or a grace period, if applicable) during which the order or call to active duty occurred.
The employer must receive a copy of the order or call to active duty before any amounts are distributed. The employer may rely on the order to determine the period that the employee has been ordered or called to active duty. The employee is eligible for a QRD if the order specifies a period of 180 or more days. It does not matter if the actual period of active duty is less or otherwise changed.
An employee will be eligible for a QRD if the original order or call is less than 180 days and subsequent calls or orders increase the total period of active duty to 180 or more days.
Distributions
Any distribution from a health FSA will be considered a QRD if it is made to an individual who is a member of a reservist group ordered or called to active duty for a period of 180 or more days provided the individual’s request for a distribution is made during a period beginning with the order and ending on the last day of the plan year (or grace period, if applicable).
An employer need not elect to amend its cafeteria plan to provide for QRDs. Except during the transition period, a QRD cannot be made from a cafeteria plan that has not been amended to allow for QRDs. The IRS provides a transition rule for QRDs made before January 1, 2010. Under this transition rule, a cafeteria plan may be amended retroactively to permit QRDs requested on or before December 31, 2009, provided all of the other requirements are met. However, this transition rule does not allow an employee to request a QRD with respect to a plan year after the plan year (or the grace period, if applicable) during which the order or call to active duty occurred.
Administration
The cafeteria plan may provide that the amount available as a QRD will be:
- the entire amount elected for the health FSA for the plan year minus any health FSA reimbursements received as of the date of the request;
- the amount contributed to the health FSA as of the date of the request minus any health FSA reimbursements received as of the date of the request; or
- some other amount not exceeding the entire amount elected for the health FSA for the plan year minus any reimbursements.
If the cafeteria plan document does not indicate how the amount will be determined, then the amount available will be the amount contributed to the health FSA as of the date of the request minus any health FSA reimbursements received as of the date of the request.
The request only applies to an employee’s health FSA balance in existence on or after June 18, 2008. Any amounts forfeited on or before June 18, 2008 attributable to a prior plan year or attributable to non-health FSAs cannot be considered in determining the amount.
An employer must pay the QRD to the employee within a reasonable time, but not more than 60 days after the request for a QRD is made. A QRD may not be made with respect to a plan year ending before the order or call to active duty.
A cafeteria plan may specify a process for employees to request QRDs. It may specify how many requests may be made by an employee during the same plan year. Additionally, a plan may also permit an employee to submit and be reimbursed for medical expense claims incurred before the request was submitted. For those expenses incurred after the request is made, the plan may either permit employees to continue to submit claims before the end of the plan year or the grace period, if applicable; or terminate an employee’s right to submit claims.
Tax and nondiscrimination considerations
QRDs are included in the employee’s gross income and are subject to employment taxes. The employer must report the QRD as wages on the employee’s Form W-2 for the year that the distribution was made to the employee.
QRDS must be uniformly available to all eligible plan participants, The QRD amounts are disregarded for the purpose of cafeteria plan nondiscrimination rules.
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