Being away on military duty is stressful enough to those serving in the military as well as their families. Extra expenses and/or reduced compensation may be in store for the families of those who are on active duty, since employers may or may not augment a reservist’s military salary with differential pay. Luckily, there are acts in place to protect military members and their family. For example, SCRA ensures personnel are protected from things like evictions and repossessions. Of course, landlords and lenders will do an active military search to ensure the person is actually eligible for SCRA and they don’t do anything that breaches the act.
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 Earning Assistance and Relief Tax (HEART) Act was signed into law 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 flexible spending account (FSA) plan. The act ensures that the most generous interpretation of the plans can be used by plan sponsors and includes special advantages for military personnel.
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? Participants or their families may not be able to incur enough expenses to deplete their accounts, or may simply not have the time or resources to file claims.
The HEART Act added a new Internal Revenue Service (IRS) Section to the 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,” this means the plan can make cash distributions to eligible individuals of all or a portion of the balance in their FSAs if they: (1) are ordered or called to active duty for a period in excess of 179 days or for an indefinite period of time, and (2) make the distribution 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. Distributions can be made without reservists incurring any qualified medical expenses or filing claims.
Typical Questions and the
Related Responses
Which benefits in a cafeteria plan are affected? The health FSA portion of the cafeteria plan is the only benefit affected. There is no effect on the dependent care, adoption assistance, premium payment, individually owned health insurance premium benefit or vacation buy/sell provisions under the plan.
Who can take advantage of the act? To take advantage of this act, individuals must have been ordered or called into active duty for at least 180 days or for an indefinite period of time. That equates to approximately six months or more of scheduled active duty.
How much can be disbursed to a reservist? The official language refers to “all or a portion of the balance in the employee’s account.” Employers may decide this means actual contributions to date minus actual disbursements. Employers could be more generous and reimburse the difference between the annual election amounts minus any previous reimbursements. This calculation is the amount participants would be entitled to at any time during the plan year if they submitted qualified expenses up to their annual election amount.
When can the money be distributed? Distributions can be made at any time during a period beginning on the date of such order and ending on the last date that reimbursement could otherwise be made under the plan. This time frame could include any run-out period noted in a plan document or a 21/2 month “grace” period after the end of a plan year in addition to the run-out period.
What about taxes? Nothing is mentioned about taxes in the new provision. It would be a reasonable assumption that applicable taxes would be applied to any distributions made from health FSAs that are not for qualified medical expenses.
When can plans begin to utilize this special provision? The effective date is for any distribution made after June 17, 2008.
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.
Do employers have to amend their plan documents? As stated above, the act is not mandatory for cafeteria plans; however, for employers to make this available to their reservists, their cafeteria plans must be amended. Amendments must be dated prior to any such disbursements from a plan.
The HEART Act also encompasses an assortment of mandatory and discretionary changes for individual retirement and qualified pension plans. For example, eligible reservists 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.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
