NEW Qualified Reservist Distributions - Questions and Answers
QRDs are a special rule allowing distributions of unused amounts in a health Flexible Spending Arrangement (health FSA) to reservists ordered or called to active duty. QRDs were included in The HEART Act that was enacted June 17, 2008, amending Section 125 of the Internal Revenue Code. On September 30, 2008, the IRS issued Notice 2008-82 that clarifies outstanding items related to Qualified Reservist Distributions, or QRDs.
What is a Qualified Reservist Distribution (QRD)?
A QRD is a distribution to an individual of all or a portion of the balance in the employee's health FSA if:
(1) the individual is a member of a reserve component ordered or called to active duty for a period of 180 days or more or for an indefinite period; and
(2) the request for distribution is made during the period beginning with the order or call to active duty and ending on the last day of the plan year (or grace period, if applicable) that includes the date of the order or call to active duty.
What is the definition of a Reserve Component?
Paragraph 24 of section 101 of title 37 of the United States Code defines the term "reserve component" to mean: (A) the Army National Guard of the United States; (B) the Army Reserve; (C) the Navy Reserve;(D) the Marine Corps Reserve; (E) the Air National Guard of the United States; (F) the Air Force Reserve; (G) the Coast Guard Reserve; or (H) the Reserve Corps of the Public Health Service.)
How long must an employee be called to be eligible for a QRD?
The call or period of active duty must be for 180 days or more or may be indefinite. The employee's eligibility is not affected if the actual period of active duty is less than 180 days or is otherwise changed from the original order.
If the period specified in the order or call is less than 180 days, a QRD is not allowed. However, subsequent calls or orders that increase the total period of active duty to 180 days or more will qualify an employee for a QRD. Thus, for example, if an employee is ordered or called to active duty for 120 days, and his or her order or call is subsequently extended for an additional 60 days, that individual qualifies for a QRD. The employee may submit the form and revised order or call to active duty at the time it is extended.
Who is eligible to request a QRD?
An employee who is, by reason of being a member of a reserve component is ordered or called to active duty for a period of 180 days or more or for an indefinite period may request a QRD.
An individual ordered or called to active duty before June 18, 2008 is eligible for a QRD if the individual's period of active duty continues after June 18, 2008 and meets the duration requirements in this notice.
A QRD may not be made based on an order or call to active duty of any individual other than the employee, including the spouse of the employee.
May a QRD be made from a dependent care spending account?
No. A QRD may only be made from a health flexible spending account.
Is an Employer required to offer the QRD option?
No. The decision of whether to allow a QRD from a health FSA is optional with the employer. If offered, QRDs must be uniformly available to all plan participants.
Do I need to amend my plan document before offering the QRD?
Yes*. The plan document must be amended to include the QRD option before a QRD can be issued (see Transition Rule*). The plan may be amended at any time on a prospective basis.
*Transition Rule for QRDs made before January 1, 2010
The IRS is allowing a special transition rule that states a plan may be amended retroactively to permit QRDs requested on or before December 31, 2009, provided that the QRD satisfies all of the other requirements for a QRD contained in Notice 2008-82. The retroactive amendment must be made by December 31, 2009, and be effective retroactively to the date of the first QRD paid under the plan, but not prior to June 18, 2008.
Note that this transition rule does not extend the period during which an employee may request a QRD. Thus, regardless of when the plan is amended, the transition rule does not allow an employee to request a QRD with respect to a plan year after the last day of the plan year (or grace period, if applicable) during which the order or call to active duty occurred.
When will plan amendments be available from Discovery?
Discovery is working with its software vendor now and will notify employers offering QRDs when the amendments are available. Because of the transition rule, an employer can go ahead and request a QRD amendment for its plan by calling Employer Services at 866-451-3399. Employer Services will send you a QRD Employer Amendment Request Form to complete and return to Discovery. The form is also available on our web site under printable forms, FSA.
When must a QRD request be made?
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 plan year (or grace period, if applicable) during which the order or call to active duty occurred. A QRD may not be made for a plan year ending before the order or call to active duty.
For which plan years may a QRD be made?
A QRD may only be made for an employee's health FSA balance in existence on or after June 18, 2008. A QRD may not be made for (1) amounts forfeited on or before June 18, 2008, (2) amounts attributable to a prior plan year (including a plan year ending on or before June 18, 2008), or (3) amounts attributable to non-health FSAs.
What does an employee need to do to request a QRD?
The employee must complete a QRD Request Form found under printable forms, FSA, at discoverybenefits.com. The employee attaches a copy of the order or call to active duty to the form and submits the documentation to the employer for approval. The employer retains a copy for its record and faxes (866-451-3245) or mails (PO Box 2926, Fargo, ND 58108-2926) a copy of the form and documentation to Discovery.
The employer is asked to review the request due to the special transition rule allowing for QRDs prior to the plan being amended. The employer will also need to document the amount of the request so it can report the amount as taxable income on the employee's W-2.
What amount is available to the employee as a QRD?
An employer may amend the plan to include one of the following options.
1) Recommended and default option: The amount contributed to the health FSA as of the date of the QRD request minus health FSA reimbursements received as of the date of the QRD request.
2) The entire amount elected for the health FSA for the plan year minus health FSA reimbursements received as of the date of the QRD request.
How does this affect an employee's access to the health FSA for medical expenses before or after the QRD?
A plan must permit an employee to submit health FSA claims for medical expenses incurred before the date a QRD is requested and must pay or reimburse substantiated claims for those medical expenses.
An employer may amend the plan to allow one of the following two options for reimbursing medical claims after the date a QRD is requested:
(1) permit employees to continue to submit health FSA claims incurred before the end of the health FSA plan year (and grace period, if applicable); or
(2) terminate an employee's right to submit claims.
Is the QRD taxable to the employee?
Yes. A QRD is included in the gross income and wages of the employee, and is subject to employment taxes. The employer must report the QRD as wages on the employee's Form W-2 for the year in which the QRD is paid to the employee.
The amount reported as wages is reduced by any amount in the health FSA representing after-tax contributions (such as COBRA continuation premiums).
Discovery will notify the employer of the amount distributed once the distribution is approved.
How does a QRD affect cafeteria plan non-discrimination rules?
The QRD amounts are disregarded for purposes of the cafeteria plan nondiscrimination rules.
If you have any questions concerning QRDs, please call Discovery Benefits at 866-451-3399 or email customerservice@discoverybenefits.com.
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