June 17, 2008 -FSA plan change option for participants who are called to active duty.
HEART Act Requires Amending Benefit Plans for Military Reservists
On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 into law. ( H.R. 6081) .
Under the HEART Act, military reservists who are called to active duty for 180 days or more can receive distributions from unused funds in their health care flexible spending accounts (FSAs).
Qualified reservist distributions can be made from an FSA without penalties. The law allows the reservists not to forfeit the money under the “use it or lose it” rules that generally apply to cafeteria benefits plans.
Plan Sponsors who wish to allow for the distributions to qualified military reservists must amend their cafeteria plan document and then must notify all plan participants of the changes by providing them with a Summary of Material Modification (SMM).
There are a number of issues that are raised by this new provision. Unfortunately, the explanation of this provision prepared by the staff of the Joint Committee on Taxation (JCT) is only two sentences long. Accordingly, guidance from the IRS and the Treasury Department will be needed to clear up any questions.
- Tax treatment of qualified reservist distribution. Neither the bill nor the explanation state whether the distribution is taxable to the recipient.
- Amount of the distribution. The statutory text states that the amount of the distribution is “all or a portion of the balance in the employee’s account,” which might be subject to some questioning since there really isn’t an account in a cafeteria plan. However, the JCT explanation only refers to “the individual’s FSA balance” which is a clearer explanation of what occurs in these plans. By relying on the JCT explanation’s reference to the FSA balance, the amount that can be distributed would most likely be the amount credited toward participant’s health FSA as of the time of the distribution, reduced by the health FSA benefits already paid. Existing health FSA rules require that the maximum health FSA reimbursement amount elected by an individual for a plan year be available throughout the plan year (minus any amounts reimbursed) regardless of the amount contributed by the individual to the health FSA. Therefore, it is possible that during a plan year, an individual can be reimbursed an amount from his or her health FSA that is greater than what he or she has contributed. This raises a legitimate question as to how this requirement applies in the case of qualified reservist distributions, which the IRS could address in regulatory guidance.
- Application of nondiscrimination rules. Since cafeteria plans and health FSAs do not have to permit qualified reservist distributions, such distributions, if permitted, would presumably be subject to nondiscrimination rules. It would be helpful if the IRS made it clear that qualified reservists distributions need only be offered in a nondiscriminatory manner rather than made in a nondiscriminatory manner.
Clients who wish to amend their plan documents to allow for this provision should contact Rudy Allebach at 888-318-7472 ext. 1252.