Military reservists will be able to recoup unspent funds in their employer's health Flexible Spending Arrangement (health FSA) accounts after being called to active duty, according to guidance from the Treasury Department and Internal Revenue Service.
Under the Heroes Earnings Assistance and Relief Tax Act of 2008, active-duty reservists are entitled to "qualified reservist distributions" (QRDs) of unused amounts in their health FSA. Previous rules stipulated that distributions could be made only to reimburse reservists for substantiated medical expenses, and unused funds would be lost.
Notice 2008-82 explains that reservists can make a distribution before leaving for active duty, so they do not lose unused funds. The provision, which is optional for employers, specifies that QRDs must be included in the reservist's income and wages.