Under the Heroes Earnings Assistance & Relief Tax Act (the “HEART Act”), an employer may amend its health flexible spending arrangement to allow reservists called to active duty to withdraw all or a portion of the balance in their flexible spending accounts (“FSA”). Although generally a benefit plan must be amended before qualified reservist distributions (“QRD”) may be made, a transition rule allows employers to amend their plan anytime before January 1, 2010, with the effective date retroactive to the first QRD.

To take advantage of this option, the reservist must be called to active duty for at least 180 days, indefinitely, or on consecutive occasions totaling at least 180 days. The QRD must be made on or after the day the individual is called to active duty and on or before the last date on which employees can submit claims for reimbursement from the FSA for the year in which the individual is called to active duty. The distribution need not be for substantiated medical expenses. This distribution will be taxable to the employee and should be reported on his or her W-2. The employee must request a distribution on or after the date of call to active duty and before the last day of the plan year or applicable grace period for the plan year of the call to active duty. The employer must receive a copy of the employee’s order or call to active duty, and then pay the distribution within a reasonable time, but not more than 60 days after the request.

Effective Date

The HEART Act took effect on June 18, 2008. If implemented, this provision applies to distributions made after June 17, 2008, and to employees called to active duty before June 18, 2008, whose period of active duty continues after this date and satisfies the duration requirement.

Action Required

No action is required unless an employer desires to implement this new option.