HEART Act Guidance Clarifies Health FSA Distributions For Reservists

Under new guidance issued by the Internal Revenue Service (IRS), employers will more easily be able to allow workers who have been called up to active military duty to take full advantage of “qualified reservist distributions” from their health flexible spending accounts (FSAs).

Allowed under the HEART Act (formally, the Heroes Earning Assistance and Relief Tax Act of 2008) which was signed into law on June 17, these distributions are designed to give reservists who have been called or ordered to active duty for at least 180 days or an indefinite period access to funds in their health FSAs. IRS Notice 2008-82 clarifies, though, that these distributions would be “wages” subject to federal income and employment taxes.

The Notice also clarified other health FSA-related provisions of the HEART Act:

  • Plan amendments – Generally qualified reservist distributions cannot be made until a plan is amended to allow for them on a prospective basis. Under a special transition rule, a qualified distribution could be made on or after June 18, 2008, so long as a plan is amended to provide for them no later than Dec. 31, 2009.
  • Which orders or call-ups are covered? An employer must review the employee’s call or order to duty before granting an employee request for a distribution. If the order or call specifies that the period of active duty is either 180 days or more or indefinite, the reservist is eligible for a distribution – even if the actual period of active duty ends up being less than 180 days. By contrast, if the period specified is less than 180 days, qualified distributions would not be allowed (unless later orders or call-ups extend the period).
  • Amount of distributions – A health FSA may specify the amount available for a qualified reservist distribution as: (1) the full annual elected amount of health FSA contributions minus any reimbursements actually received; (2) the amount actually contributed to the health FSA at the time of the request minus any reimbursements actually received; or (3) some other amount not exceeding the entire election for the year minus any reimbursements. Option (2) above is the default if a plan does not otherwise specify.

When to request a distribution – A reservist must request a distribution after the order or call to active duty, but before the last day of the plan year (or grace period, if the plan has adopted one). This requirement would seem to hinder one strategy that looked feasible under the statute itself: using these distributions as an automatic step at the end of the claims run-out period, simply to prevent forfeitures by any qualified reservists.

Under the HEART Act, qualified reservist distributions would be allowed for members of the Army, Navy, Marine, Air Force or Coast Guard reserves, along with the Army or Air National Guards, or the Reserve Corps of the Public Health Service.

Retirement plan provisions of the HEART Act are set to take effect in 2010 and are not covered in Notice 2008-82.