IRS Provides Guidance on Reservist FSA Distributions

The notice explains that Section 114 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), enacted June 17, 2008, amended section 125 of the Internal Revenue Code to provide a special rule allowing distributions of unused amounts in a health FSAs to reservists ordered or called to active duty (See Rules/Regs: Heroic Measures ). QRDs are an exception to the rule that a health FSA may not make distributions other than reimbursements of substantiated medical expenses.

In general, the IRS said, a QRD is a distribution to an individual of all or a portion of the balance in the employee’s health FSA if:

(1) the individual is a member of a reserve component ordered or called to active duty for a period of 180 days or more or for an indefinite period, and

(2) the request for distribution is made during the period beginning with the order or call to active duty and ending on the last day of the plan year (or grace period, if applicable, under Prop. Treas. Reg. § 1.125-1(e)) that includes the date of the order or call to active duty.

A cafeteria plan is not required to provide for a QRD; the decision is opted by the employer. A QRD may not be made before the cafeteria plan is amended to provide for a QRD from a health FSA; however, the notice provides that a plan may be amended retroactively to permit QRDs requested on or before December 31, 2009, provided that the QRD satisfies all requirements.

The retroactive amendment must be made by December 31, 2009, and be effective retroactively to the date of the first QRD paid under the plan, but not prior to June 18, 2008. This transition rule does not extend the period during which an employee may request a QRD.

Notice 2008-82 is here .