The Treasury Department and Internal Revenue Service have issued Notice 2008-82, which protects reservists from losing funds in their health Flexible Spending Arrangement (health FSA) accounts after being called to active duty.
The Heroes Earnings Assistance and Relief Tax Act of 2008, enacted June 17, 2008, provided a special rule allowing "qualified reservist distributions" (QRDs) of unused amounts in a health FSA to reservists called to active duty. Under the existing rules for health FSAs, distributions could only be made to reimburse substantiated medical expenses, and any funds left unspent at the end of the plan year would be lost. This special rule allows reservists to make a distribution before leaving for active duty so as not to lose those savings.
The guidance clarifies that:
- The provision is optional for employers;
- Health FSAs must be amended if an employer wants to allow QRDs; a transition rule allows plans to be amended effective retroactively to provide for QRDs prior to January 1, 2010;
- QRDs are included in the income and wages for the reservist;
- Employees may request a QRD when they receive an order or call to active duty, and before the last day of the plan year (and grace period, if applicable); and
- Employers may allow employees to continue to participate in the health FSA after the QRD if amounts remain in the health FSA.