Pending Bill Would Allow FSA Withdrawals for Military

June 10 , 2008

In another attempt to help those called to active military duty, Congress passed House Bill 6081, better known as the HEART Act, with overwhelming bipartisan support. As of this writing, President Bush was expected to sign the law.

Recall that in January, Congress expanded the FMLA to help those on active military duty. Now, the Heroes Earnings Assistance and Relief Tax Act of 2008 touches on several areas of benefits for military reservists during their active service:

• Health FSA Distributions. The law allows (but does not require) Health FSAs to permit reservists to take some or all of their unused account balance when called to active duty for at least six months. The distributions may be made as late as the last day of the run-out period for the plan year in which the leave begins. The distribution would be on an after-tax basis. The law effectively allows these employees to avoid the burden of the use-or-lose rule.
  
  The law takes immediate effect once enacted. It does not amend Section 105 of the Internal Revenue Code, which would disqualify a Health FSA with such a scheme. It does not define “account balance,” which could mean either the difference between the full year’s election amount and the amount already reimbursed or the difference between the current payroll deduction amount and the amount already reimbursed. For many employers trying to control costs, that would make a difference. You must amend your plan documents to provide this benefit.



• 401(k) and Pension Provisions. The Pension Protection Act allows reservists on active duty to take a distribution without incurring the 10 percent penalty as long as the leave began before January 1, 2008. The HEART Act makes this allowance permanent.
  
  Pension plans and 401(k)s are allowed to provide extra survivor benefits to families of employees who die on or after January 1, 2007, during qualified military service. Plans can also provide extra benefits for disabilities incurred on or after January 1, 2007, as a result of active military service. Plans must treat any differential pay (i.e., employer payments that make up the difference between military pay and regular wages) as compensation for benefit calculation purposes.



• Mental Health Parity Extension. Finally, the law extends for another year the mental health parity mandates that apply to group health plans regarding annual and lifetime coverage limits for mental health care services. The original mental health parity law was passed in 1996 and expired on December 31, 2007. These requirements are now effective through the end of 2008.

To review the pending bill, simply go to http://thomas.loc.gov and type in “HR 6081.”