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Being away on military duty is stressful enough to both the person serving in the military and to their families. Extra expenses and/or reduced compensation may be in store for the families of those who are on active duty. In addition, employers may or may not augment a reservist’s military salary with differential pay.
Without their regular stream of income, military families may find themselves short of cash for everyday expenses. That’s where the HEART Act comes into play.
The Heroes Earnings Assistance and Relief Tax (HEART) Act was passed by Congress in May and signed into law by the President on June 16, 2008. It is a combination of changes to different portions of the law regulating retirement, pension, and cafeteria plans. Its purpose is to give military personnel expanded benefits and access to the money they have set aside for retirement or contributed to a cafeteria flexible spending account (FSA) plan. The Act ensures that the most generous interpretation of the plans may be used by plan sponsors, and includes special advantages for military personnel.
Following the enactment, the Internal Revenue Service (IRS) issued Notice 2008-82 to provide additional guidance.
Cafeteria Plans
Elections are made on a prospective basis at the beginning of any plan year for cafeteria plans – but what happens when an employee is called into active duty overseas? The participant or their family may not be able to incur enough expenses to deplete their account, or may simply not have the time or resources to file a claim.
The HEART Act added a new section to the IRS 125 Code regarding cafeteria plans. It is called: "Special rule for unused benefits in health flexible spending arrangements of individuals called to active duty."
Called a Qualified Reservist Distribution (QRD), this means the plan can make a cash distribution to an eligible employee of all, or a portion of, the balance in their FSA if:
1) the individual was ordered or called to active duty for a period in excess of 179 days or for an indefinite period of time, and
2) the request for distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could otherwise be made under the FSA.
The distribution can be made without the reservist incurring any qualified medical expenses or filing a claim.
Now let’s look at some typical questions and their related responses.
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Which benefits in a cafeteria plan are affected? The health FSA portion of the cafeteria plan is the only benefit affected. The Act does not have an effect on the dependent care, adoption assistance, premium payment, individually-owned health insurance premium benefit, or vacation buy/sell provisions under the plan. |
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Who can take advantage of the Act? To take advantage of this Act, the employee/participant must have been ordered or called into active duty for at least 180 days or for an indefinite period of time. This equates to approximately six months or more of scheduled active duty. The plan participant must submit a request to their employer on or after the date of the order or call to active duty, and before the last day of the plan year (or grace period, if applicable) during which the order or call to active duty occurred. |
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What must the employer do to offer this arrangement?
- Amend their cafeteria plan document.
- Receive a timely request from their employee/participant.
- Receive a copy of the order or call to active duty.
- Confirm that the order or call to active duty is in excess of 179 days. |
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How much can be disbursed to the reservist? The official language refers to "all or a portion of the balance in the employee’s account." Employers may amend their plan document to interpret "balance" to mean:
1) the amount contributed to the health FSA as of the date of the QRD request minus health FSA reimbursements received, or
2) the entire amount elected for the health FSA for the plan year minus health FSA reimbursements received as of the date of the QRD request, or
3) some other amount (not exceeding the entire amount elected for the health FSA for the plan year minus reimbursements). |
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When can the money be distributed? The distribution must be made to the participant within a reasonable time, but not more than 60 days after the request for a QRD is made. A QRD may not be made with respect to a plan year that has already ended, or before the effective date of the QRD plan amendment. |
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What about taxes? The QRD is included in the gross income and wages of the employee and is subject to employment taxes. The QRD is reported as gross income on the employee’s Form W-2 for the year in which it is paid. |
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When can plans begin to utilize this special provision? The effective date is for any distribution made after June 17, 2008. |
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Is this law mandatory for all cafeteria plans? Although the provisions were enacted into law, they are not mandatory. Employers are not required to implement the changes outlined for cafeteria plans. |
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Do employers have to amend their plan documents? As stated above, the Act is not mandatory for cafeteria plans, although for an employer to make this available to their reservists; the cafeteria plan must be amended. The amendment must be dated prior to any such disbursements from the plan.
However, the IRS did make an allowance for retroactive amendments. A plan may be amended retroactively to permit QRDs requested on or before December 31, 2009, provided the QRD satisfies the other requirements of the notice. Nevertheless, the transaction rule does not extend the period during which an employee may request a QRD.
A plan must permit an employee to submit health FSA claims for medical expenses incurred before the date a QRD is requested and must pay or reimburse substantiated claims for those medical expenses.
If the plan document is silent as to how to calculate a participant’s balance for the QRD payout, the calculation will be the amount contributed to the health FSA as of the date of the QRD request minus health FSA reimbursements received.
After the date a QRD is requested, the plan may permit employees to continue to submit health FSA claims incurred before the end of the cafeteria plan or terminate an employee’s right to submit claims. Administratively speaking, it might be easier for the plan to terminate an employee’s right to submit claims if the QRD has been paid out.
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How should the QRD amounts be treated for discrimination testing? The plan must make QRDs uniformly available to all plan participants and the QRD amounts are not included for purposes of the cafeteria plan nondiscrimination rules. |
The HEART Act also encompasses an assortment of mandatory and discretionary changes for individual retirement and qualified pension plans. For example, an eligible reservist may obtain a disbursement from a retirement plan without paying an additional penalty, or their families may receive Economic
Stimulus payments and expanded death benefits. For more information about the HEART Act and how it affects retirement plans, consult a retirement plan specialist.
 
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