IRS Issues Guidance on FSA Distributions for Military Reservists

IRS Notice 2008-82 was issued jointly by the Treasury Department and the Internal Revenue Service (IRS) and provides guidance for “qualified reservist distributions” (QRDs) that are provided for in the Heroes Earning Assistance and Relief Tax Act of 2008 (HEART). As previously announced, a cafeteria plan may allow QRDs for any unused funds or balances left in reservists’ health flexible spending accounts (health FSA), which may be distributed if they are called to or performing active duty after June 18, 2008. Because the QRD funds are not required to be substantiated health expenses, they are to be included in the gross income and wages of the employee.

The Notice clarifies that the request for distribution may be made anytime from the date of the order to the last day of the plan year. The plan must complete the distribution within 60 days of request. The amount available for distribution must be decided upon by the plan and documented in the plan document. The amount may be the entire annual election amount minus any distributions, the year-to-date contributions minus any distributions, or another amount. The Notice also includes a transition rule allowing for retroactive QRD cafeteria plan amendments made prior to January 1, 2010.