Employers may amend Health Care Flexible Spending Account (FSA) plans to permit reservist employees called to active duty to request distributions from their accounts. Qualified reservist distributions (QRDs), as these disbursements of health care FSA funds are called, were created by the Heroes Earnings Assistance and Relief Act of 2008, and guidance for QRD administration can be found in Internal Revenue Service Notice 2008-82. They are an exception to the general rule that health care FSA distributions can only be made for substantiated medical expenses.
An employee who is called to active duty for a period of 180 days or more, or for an indefinite period, may request a QRD (so long as the plan provides for it, as described below). The request may be for all or a portion of the balance in the employee’s FSA. The employee must make the request no earlier than the date of the order or call to active duty and no later than the last day of the plan year (or grace period if the plan uses one) during which the order or call to duty occurred.
The Notice specifies that QRDs are optional with an employer, meaning that an employer can choose whether or not to amend its cafeteria plan to permit them. However, if QRDs are to be permitted, a plan amendment is required, and a QRD may not be made until the plan is amended. However, Notice 2008-82 does provide a transition rule for QRDs made before January 1, 2010. This rule enables plans to be amended retroactively to permit QRDs requested on or before December 31, 2009, so long as the QRD satisfies the other requirements and the retroactive amendment is made by December 31, 2009.
The plan amendment should specify how the FSA balance of the employee requesting a QRD is determined. This could be the amount of the annual election minus disbursements to date; the amount actually contributed minus disbursements to date; or some other amount (but not to exceed the annual election minus disbursements). If the plan amendment does not specify this, the amount available for the QRD will be contributions minus disbursements. The requested distribution must be paid within a reasonable time, not to exceed 60 days after the request has been made. The QRD amount will be included in the reservist’s gross income in the year paid, and must be reported on the employee’s W-2.
The plan amendment also can specify a process for employees to request a QRD, including how many requests may be made by an employee during the same plan year and whether the employee may continue to submit FSA claims after the date the QRD is requested.
The effective date of the law creating QRDs was June 18, 2008; thus, a QRD can only be made with respect to FSA balances in effect on or after that date. Also, QRDs cannot be made from non-health FSAs, such as dependent care spending accounts.