October 12, 2008

HEART Act FSA Cash-out Explained

In June, 2008, a law was passed (Heroes Earnings Assistance and Relief Tax Act of 2008, “Heroes Act” or “HEART Act”, Public Law 110-245; see the June 2008 edition of Benefit Beat), addressing several employment and benefit-related matters specifically applicable to employees called to active service. One of these provisions allow a distribution for non-medical reasons from a health flexible spending account (health FSA). The IRS has issued Notice 2008-82 flushing out this provision.

The health FSA cash-out option is available to reservists called to active duty for at least 180 days, or for an indefinite period of time. It is intended to provide relief from the otherwise applicable “use-it or lose-it” standard of a health FSA.

It is very important to note that a plan is not required to adopt this provision. If the employer wants to allow the cash-out option, the health FSA plan must be amended. Generally, plan amendments must be prospective; however, according to this guidance, a transition period is provided through December 31, 2009. According to this transition rule, as long as the health FSA plan is amended by 12/31/09, a cash-out of account balances in existence on or after 6/18/08, can be requested. Distributions of forfeited amounts prior to 6/18/08 cannot be made.

To be eligible for the cash-out, a request must be made prior to the end of the plan year, including grace periods, in which the call to service commences. If the service commenced prior to 6/18/08, but extends beyond that date, the individual would still be entitled to request a cash-out, as long as the plan so permits.

To be entitled to the cash-out, the employer must be provided a copy of the military orders. The amount available for distribution is defined by the plan, and can be:

  1. The full election amount, less reimbursements;
  2. The amount contributed up to the date of the call to service, less reimbursement amounts (the default option, if the plan does not otherwise specify); or 
  3. Some other amount, as long as it does not exceed the annual election amount.

The plan defines the procedures applicable to the cash-out options, including the number of cash-out requests that can be made, and the method for calculating maximum distribution amounts, among other things.

The cash-out is only available to an employee called to active service. It is not available to an employee whose spouse is called to active service.

The plan must also define:

  • Whether participation in the health FSA will terminate upon the call to service; and
  • Whether claims incurred after the call to service, and prior to the end of the plan year, including grace periods, will be reimbursed. Claims incurred prior to the call to service must be reimbursed.

The cash-out must be processed and paid within a reasonable time, but not more than 60 days following the request.

Cash-outs are subject to income and employment taxes.


The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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