Law Firm Seeks Clarity Under Guidance on Treatment of Qualified Reservist Distributions From Health FSAs

From: Hickman, John [John.Hickman@alston.com]

First, 2008-82 states under the heading "Amount Available as a QRD" that the plan may provide that the amount available as a QRD will be:

Question: Is the plan required to treat claims for expenses incurred and submitted but not yet reimbursed (IBNR) at the time of the QRD request just like any other claim rather than including such amounts in the QRD? We would assume so, given the taxability of the QRD.

Second, under the heading "Cafeteria Plan QRD Procedures" the Notice states that "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. With respect to medical expenses incurred after the date a QRD is requested, the plan may either (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."

It seems to us that the intent of this second provision is to protect a participant ("Joe"), who elects $1200, incurs $1200 in expenses by March after contributing only $300, and then is called to active duty and requests a QRD. If Joe's employer chooses to make a QRD based on contribution amount and not based on total annual election, then Joe (assuming he has not yet submitted any claims for those $1200 of incurred expenses) would be entitled to a $300 QRD. We believe the rule stated above that employers MUST reimburse eligible expenses incurred before the QRD request is intended to protect people like Joe so he can still get reimbursed for his incurred expenses, up to $900 ($1200 minus the $300 QRD).

However, assume the same facts as above with regard to Joe's annual election and incurred expenses, but this time Joe's employer has decided to base the QRD on the annual election, so Joe gets a $1200 QRD. Under a strict reading of the Notice, the plan cannot explicitly terminate Joe's right to submit claims for expenses incurred prior to the QRD request; the Notice grants that authority to plans only for expenses incurred after the QRD request. Joe could then submit his $1200 in claims. Under a strict reading of the Notice, the plan must pay or reimburse substantiated claims for expenses incurred prior to the QRD request. Granted, one would assume that Joe would not want to hold on to those claims under either fact pattern because the QRD is taxable but the reimbursement is not.

Question: Must a plan reimburse a QRD recipient for expenses incurred but not reimbursed prior to the QRD even if doing so would exceed the participant's annual election?