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IRS Provides Guidance on Health FSA Distributions to Reservists

    Client Alerts
  • October 03, 2008

A recent change to health flexible spending account (“health FSA”) rules allows cafeteria plans to permit reservists called to active duty to receive “qualified reservist distributions” (“QRDs”) from the unused portion of their health FSA accounts regardless of the reason (i.e., without having to show substantiated related medical expenses).  Cafeteria plans can provide such distributions starting June 18, 2008, and the IRS issued guidance this week providing details on implementing these rules.

If an employer elects to allow QRDs, an employee wishing to request a distribution must be called up to active duty for at least 180 days or for an indefinite period and must present the order to the employer.  An employer may immediately rely on the order and allow QRDs for the employee, even if active duty ends up being fewer than 180 days.

Though allowing QRDs under a cafeteria plan is optional, if allowed they must be uniformly available to all participants.  QRD amounts are disregarded for cafeteria plan nondiscrimination rule purposes.  If allowed, the amount available as QRDs must be:

(1) the entire amount elected for the health FSA for the plan year, less reimbursements paid as of the QRD request date;
(2) the amount contributed to the health FSA as of the QRD request date, less reimbursements paid as of the QRD request date (the default if the plan is silent); or
(3) some other amount not exceeding the entire amount elected for the health FSA for the plan year less reimbursements.

A plan that allows QRDs must still allow employees to submit and receive reimbursement for health FSA claims for actual medical expenses incurred prior to a QRD request.  A plan may specify how it will handle claims for actual medical expenses incurred after a QRD request.  Such claims may either be totally disallowed or may be submitted and reimbursed (to the extent amounts are still available) to the end of the health FSA plan year (including any extension of the optional grace period of up to 2½ months after the end of the plan year).  QRD requests must be made on or after the order date but before the end of the plan year (or any applicable grace period).  No QRD is allowed for a plan year if the order is dated after the end of the plan year (e.g., an order or call dated during a grace period following a plan year).  QRDs must be paid within a reasonable period (60 days maximum after a request).

Unlike health FSA reimbursements for actual medical expenses, QRDs are treated as taxable wages to the employee, including being subject to FICA and other employment taxes, and must be reported on Form W-2 for the year the QRD is paid to the employee.

Generally, QRDs may not be made from a health FSA until the related cafeteria plan is amended to provide for them.  However, under a transition rule, a plan amendment need not be adopted until December 31, 2009, with an effective date retroactive to the date of the first QRD paid under the plan (though not earlier than June 18, 2008).