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The Heroes Earnings Assistance and Relief Tax Act of 2008

The Heroes Earnings Assistance and Relief Tax Act of 2008 ("HEART Act") created a new provision under Code section 125 that allows, but does not require, employers who offer a health FSA, to permit "qualified reservist distributions" (QRDs) from health FSAs.  This is an optional benefit, and employers are not required to permit such distributions.  The HEART Act was signed on June 17, 2008 and the IRS has since issued IRS Notice 2008-82,  to assist employers in their compliance efforts. 

To whom does the HEART Act apply?
To Employers who offer a health FSA and opt to offer this optional benefit.

What does the HEART Act allow employers to do?
Employers may amend their cafeteria plan documents to allow employees who are ordered or called to active duty as a reservist for a period of 180 days or longer, to receive a QRD of all or part of the employee's unused health FSA balance.  If the order or call to active duty is less than 180 days, the employee is not eligible for a QRD.  However, if the orders are later extended, the employee would then be eligible for the qualified reservist distribution so long as the total call exceeds 180 days.

Some other key highlights of the Act are outlined below: 

• Amount of Distribution.  Employers have three options in determining the amount available under a QRD.  Those options are to allow either (1) the amount elected for the health FSA for the plan year minus the health FSA reimbursements received as of the date of the request; (2) the amount contributed to the health FSA as of the date of the request for distribution minus health FSA reimbursements received as of the date of request; or (3) some other amount (not exceeding the entire amount elected for the health FSA for the plan year minus reimbursements).
• Deadline for Requesting Distribution.  An employee must request a QRD 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 a group has adopted one) during the plan year in which the order or call to active duty occurred.
• Deadline for Making Distribution.  Employers must make the QRD to the employee within a reasonable time, but not more than sixty days after the request is made. Employers must receive a copy of the order or call to active duty before any distribution may be made. 
• Tax Treatment.  QRDs must be included in the gross income and wages of the employee and is subject to employment taxes. Any contributions that are made with after-tax contributions would not be considered as additional wages.

When did the HEART Act go into effect?
The Heart Act applies to distributions made on or after June 18, 2008. Any employee who reported to active duty before June 18, 2008, may still receive a QRD if they are in active status.

How does the HEART Act impact employers?
First, employers must determine whether or not they want to allow this optional benefit. If they decide to offer this benefit, plan documents are going to have to be amended. IRS Notice 2008-82 , provides a transition rule. If an employer is unsure whether or not they want to adopt this benefit now, IRS Notice 2008-82, allows plans to be amended retroactively, provided all of requirements of the HEART Act are met and plans are amended by December 31, 2009.