The HEART Act of 2008 - Benefits for Military Personnel

Being away on military duty is stressful enough to both the persons 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. And, 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 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 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? 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 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 a cash distribution to an eligible individual 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 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.

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.

Who can take advantage of the Act? To take advantage of this Act, the individual 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 the 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. The employer could be more generous and reimburse the difference between the participant’s annual election amount minus any previous reimbursements. This calculation is the amount the participant 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? The distribution can be made at any time during the period beginning on the date of such order and ending on the last date that reimbursement could otherwise be made under the plan. This timeframe could include any run out period noted in the plan document. It could also include the 2 ½ month "grace" period after the end of the 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 distribution made from a Health FSA that was 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 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.

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.