IRS RELEASES NOTICE 2008-82
GUIDANCE ON QUALIFIED RESERVIST DISTRIBUTIONS

Introduction

On September 29, 2008, the Internal Revenue Service (IRS) released Notice 2008-82 which provides guidance on new Internal Revenue Code Section 125(h).  This new section provides a special rule allowing distributions of unused amounts in a Health Flexible Spending Account (Health FSA) to reservists ordered or called to active duty.  It applies to distributions made on or after June 18 2008. These distributions are called Qualified Reservists Distributions or QRDs The following is an overview of the guidance.

When will a distribution from a Health FSA be considered a Qualified Reservist Distribution?

Any distribution from a Health FSA will be considered a Qualified Reservist Distribution if it is made to an individual who is a member of a reservist group ordered or called to active duty for a period of 180 or more days provided the individual’s request for a distribution is made during a period beginning with the order and ending on the last day of the plan year ( or grace period, if applicable).

Does an employer have to amend its cafeteria plan to provide for QRDs?

No. The provision is optional.

Before a QRD is made, must a cafeteria plan be amended?

Yes. A QRD cannot be made until the cafeteria plan is amended.    Once the plan is amended, it only applies on a prospective basis.   Despite this general rule, the IRS provides a transition rule for QRDs made before January 1, 2010.  Under this transition rule, a cafeteria plan may be amended retroactively to permit QRDs requested on or before December 31, 2009, provided all of the other requirements are met.  However, this transition rule does not allow an employee to request a QRD with respect to a plan year after the plan year (or the grace period, if applicable) during which the order or call to active duty occurred.

Which employees may receive QRDs?

Any individual who is ordered or called to active duty because he or she is a member of a reservist unit for a period of at 180 or more days may request a QRD.  Any individual called to active duty before June 18, 2008 and whose period of active duty continues after June 18, 2008 may request a QRD if the period of active duty meets the duration requirements.  The right to receive a QRD only applies to the employee who is called to active duty.  It does not apply if any other family member is called to active duty.

Before the employer makes the QRD, must it receive a copy of the order?

Yes. The employer must receive a copy of the order or call to order before any amounts are distributed.  The employer may rely on the order to determine the period that the employee has been ordered or called to active duty.  The employee is eligible for a QRD if the order specifies a period of 180 or more days.  It does not matter if the actual period of active duty is less or otherwise changed.

An employee will be eligible for a QRD of the original order or call is less than 180 days and subsequent calls or orders increase the total period of active duty to 180 or more days.

What amount can be distributed to the employee under the QRD?

The cafeteria plan may provide that the amount available as a QRD will be:

1.   The entire amount elected for the Health FSA for the plan year minus any 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 minus any Health FSA reimbursements received as of the date of the request;  or

3.   Some other amount (not exceeding the entire amount elected for the Health FSA for the plan year minus any reimbursements.

If the cafeteria plan document does not indicate how the amount will be determined, then the amount available will the amount contributed to the Health FSA as of the date of the request minus any Health FSA reimbursements received as of the date of the request.

The request only applies to an employee’s Health FSA balance in existence on or after June 18, 2008.  Any amounts forfeited on or before June 18, 2008 attributable to a prior plan year or attributable to non-Health FSAs cannot be considered in determining the amount.

In order to submit a request for a QRD, may an employer specify procedures to be followed before an QRD is granted?

Yes.  A cafeteria plan may specify a process for employees to request QRDs.  It may specify how many requests may be made by an employee during the same plan year.  Additionally, a plan may also permit an employee to submit and be reimbursed for medical expense claims incurred before the request was submitted.  For those expenses incurred after the request is made, the plan may either permit employees to continue to submit claims before end of the plan year or the grace period, if applicable; or terminate an employee’s right to submit claims.

When must an employee request a QRD?

An employee may request an QRD on or after the date of the order or call to active duty and before the last day of the plan year (or a grace period, if applicable) during which the order or call to active duty occurred.

When must the employer pay the QRD to the employee?

An employer must pay the QRD to the employee within a reasonable time, but not more than 60 days after the request for a QRD is made.  AQRD may not be made with respect to a plan year ending before the order or call of active duty.

How are the cafeteria plan nondiscrimination rules applied to QRDs?

QRDS must be uniformly available to all plan participants, The QRD amounts are disregarded for purpose of the cafeteria plan nondiscrimination rules.

How are QRDs taxed?

QRDs are included in the employee’s gross income and are subject to employment taxes.  The employer must report the QRD as wages on the employees Form W-2 for the year that the distribution was made to the employee.