The IRS has issued guidance in Notice 2008-82 detailing how military reservists who are called to active duty may avoid the "use-it-or-lose-it rule" that generally applies to unused funds in a health flexible spending account (health FSA).
The Heroes Earnings Assistance and Relief Tax Act of 2008, enacted June 17, 2008, amended Sec. 125 to provide a special rule allowing distributions of unused amounts in a health FSA to reservists ordered or called to active duty. The new rule applies to distributions made on or after June 18, 2008.
The Heroes Earnings Assistance and Relief Tax Act of 2008, enacted June 17, 2008, amended Sec. 125 to provide a special rule allowing distributions of unused amounts in a health FSA to reservists ordered or called to active duty. The new rule applies to distributions made on or after June 18, 2008.
Additional Resources:
TaxAlmanac provides one of the best articles of explanation. Here is an excerpt:
House Reaffirms Commitment to America’s Armed Forces
Bill would provide essential tax relief to military families
WASHINGTON, D.C. - The House of Representatives approved bipartisan legislation to deliver tax relief to the men and women of our nation’s armed services, as well as others volunteering in service in America. The bill, H.R. 6081, the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, also makes a critical change to current law that will enable thousands of active duty military families to qualify for economic stimulus payments. H.R. 6081 passed the House by a vote of 403-0.
“This bill is called the HEART Act, but I would prefer to call it the thank you bill – thank you to the tens of thousands of American men and women who have responded to America’s call to fight this war and place themselves in harm’s way to serve this nation,” said Chairman Charles B. Rangel (D-NY), chief sponsor of the HEART Act. “This bill enhances their ability to get tax benefits such as the Earned Income Tax Credit, buy homes, make penalty-free withdrawals from their pension plans, access amounts held in a Flexible Savings Account, and remove other impediments that keep them from getting the relief they deserve.
“The HEART Act would also make an important change to the recently-passed stimulus bill to allow thousands of active duty military families to receive a stimulus check they were previously denied because one spouse did not have a Social Security number,” said Chairman Rangel. “This legislation corrects this injustice to ensure that our active duty military families are not disadvantaged under our tax laws.”
Both the House and Senate have passed earlier versions of the HEART Act. H.R. 6081 is an attempt to streamline provisions in those bills for final passage.
Among other things, the Heroes Earnings Assistance and Relief Tax Act of 2008 would:
Clarify that active military who file a joint tax return would be eligible for the stimulus rebate payment even if the spouse does not have a Social Security number.
Make permanent the ability to include combat pay as earned income for purposes of the Earned Income Tax Credit (EITC);
Make permanent and modify qualified mortgage bonds used to finance residences for veterans;
Modify the Uniformed Services Employment and Re-employment Rights Act (USERRA) to allow the day prior to the date of death to be treated as the date the employee returned to work for purposes of triggering payment of benefits under a qualified plan;
Permit an employer to make certain contributions to a qualified pension plan on behalf of an employee who is killed or become disabled in combat;
Make permanent the expiring Internal Revenue Code provision that permits active duty reservists to make penalty-free withdrawals from retirement plans;
Permit recipients of military death benefit gratuities to roll over the amounts received, tax-free, to a Roth IRA or an Education Savings Account;
Provide a tax credit for small employers with respect to differential wage payments to employees who are on active military duty;
Permit members of the reserves members called to active duty to withdraw amounts held in a Flexible Spending Account (FSA) without penalty;
Extend current law excise tax for failure to comply with the mental health parity requirements for benefits for services furnished on or after the date of enactment through December 31, 2008;
Ensure fairer treatment of military families with disabled children who depend on Supplemental Security Income (SSI) payments.
Bill would provide essential tax relief to military families
WASHINGTON, D.C. - The House of Representatives approved bipartisan legislation to deliver tax relief to the men and women of our nation’s armed services, as well as others volunteering in service in America. The bill, H.R. 6081, the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, also makes a critical change to current law that will enable thousands of active duty military families to qualify for economic stimulus payments. H.R. 6081 passed the House by a vote of 403-0.
“This bill is called the HEART Act, but I would prefer to call it the thank you bill – thank you to the tens of thousands of American men and women who have responded to America’s call to fight this war and place themselves in harm’s way to serve this nation,” said Chairman Charles B. Rangel (D-NY), chief sponsor of the HEART Act. “This bill enhances their ability to get tax benefits such as the Earned Income Tax Credit, buy homes, make penalty-free withdrawals from their pension plans, access amounts held in a Flexible Savings Account, and remove other impediments that keep them from getting the relief they deserve.
“The HEART Act would also make an important change to the recently-passed stimulus bill to allow thousands of active duty military families to receive a stimulus check they were previously denied because one spouse did not have a Social Security number,” said Chairman Rangel. “This legislation corrects this injustice to ensure that our active duty military families are not disadvantaged under our tax laws.”
Both the House and Senate have passed earlier versions of the HEART Act. H.R. 6081 is an attempt to streamline provisions in those bills for final passage.
Among other things, the Heroes Earnings Assistance and Relief Tax Act of 2008 would:
Clarify that active military who file a joint tax return would be eligible for the stimulus rebate payment even if the spouse does not have a Social Security number.
Make permanent the ability to include combat pay as earned income for purposes of the Earned Income Tax Credit (EITC);
Make permanent and modify qualified mortgage bonds used to finance residences for veterans;
Modify the Uniformed Services Employment and Re-employment Rights Act (USERRA) to allow the day prior to the date of death to be treated as the date the employee returned to work for purposes of triggering payment of benefits under a qualified plan;
Permit an employer to make certain contributions to a qualified pension plan on behalf of an employee who is killed or become disabled in combat;
Make permanent the expiring Internal Revenue Code provision that permits active duty reservists to make penalty-free withdrawals from retirement plans;
Permit recipients of military death benefit gratuities to roll over the amounts received, tax-free, to a Roth IRA or an Education Savings Account;
Provide a tax credit for small employers with respect to differential wage payments to employees who are on active military duty;
Permit members of the reserves members called to active duty to withdraw amounts held in a Flexible Spending Account (FSA) without penalty;
Extend current law excise tax for failure to comply with the mental health parity requirements for benefits for services furnished on or after the date of enactment through December 31, 2008;
Ensure fairer treatment of military families with disabled children who depend on Supplemental Security Income (SSI) payments.
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