Internal Revenue Service guidance released Tuesday, September 30, answers several questions about a new law that allows reservist employees called up for military service to take health care flexible spending account balances as cash distributions.
That law, the Heroes Earnings Assistance and Relief Tax Act, which President Bush signed this year, allows employers to amend their FSA programs to let reservists called up for at least six months of active duty take FSA funds as taxable distributions instead of forfeiting balances.
FSA balance forfeitures are not uncommon, as activated employees and their families are entitled to enroll in TriCare, a Department of Defense health care program that provides generous benefits with no premium contributions. As a result, employees have a vastly reduced need for FSAs, which pay for uncovered health care expenses. Additionally, employees called up for active duty may be deployed in parts of the world, such as Iraq, where they would have limited opportunities to use health care services eligible for FSA reimbursement.
Employers, though, have raised many questions about the new law, which the IRS guidance—Notice 2008-82—has answered.
For example, the guidance makes clear that while the distribution feature is voluntary, employers that add such a feature will have to formally amend their FSA program to incorporate it.
In addition, while the distribution feature is available only to employees called up for at least six months, workers called up for fewer than 180 days can qualify for the distribution if subsequent calls increase the total period of active duty to at least six months. For example, if an employee is called to 120 days of active duty and the order is extended for an additional 60 days, the individual would be eligible to take a cash distribution from his or her FSA.
The IRS notice also makes clear that after an employee requests the distribution, the employer must receive a copy of the order or call to active duty before it can provide the distribution.
Employees have to request a distribution on or after the date of the call to active duty and no later than the last day of the FSA plan year—or grace period, if the employer has added such a feature to its FSA—during which the call to duty occurred.
Employers generally have to provide the distribution within 60 days after the request for a distribution has been made.