You’ve Gotta Have Heart
By
Josh Norris
(Benefits Update, Summer 2008)
Last month President Bush signed into law the Heroes Earnings and Assistance and Relief Act of 2008 (HEART or the Heroes Act). The Act's provisions impact benefits under 401(k) plans. In addition, Health FSAs, group health plans, and cafeteria plans may also be impacted by some Heroes Act changes.
Death or Disability During Military Service
The Heroes Act requires 401(k) and other qualified retirement plans to provide the survivors of a plan participant who dies while performing qualified military service with additional benefits that would have been provided if the participant had resumed employment and then died. Qualified military service is the type of service that would entitle the participant to reemployment rights under the Uniformed Services Employment and Re-employment Act (USERRA). Examples of additional benefits include accelerated vesting and ancillary life insurance benefits.
Although not required, the Act permits 401(k) and other qualified retirement plans to treat individuals who die or become disabled while performing qualified military service as if they had resumed employment in accordance with their USERRA reemployment rights on the day before death or disability, and then terminated employment on the date of death or disability. The result is that these individuals (or their survivors) are allowed to receive all or part of the retroactive benefit accruals that the plan must provide to reemployed service members under USERRA. The additional benefit accruals must be credited on a reasonably equivalent basis.
These provisions apply to deaths or disabilities occurring on or after January 1, 2007.
Aiding Employees Called Up For Military Service
HEART also allows elective deferrals to be distributed to participants on active duty for more than 30 days. But individuals who elect to take a distribution will be prohibited from making elective deferrals and employee contributions for 6 months after the distribution date. This provision is effective for years beginning after December 31, 2008.
The Act permanently waives the 10 percent additional income tax on early distributions from 401(k) and other qualified retirement plans made to qualified reservists who are called to duty. Although the Pension Protection Act of 2006 initially waived the tax, it was limited to qualified reservists who were called to active duty after September 11, 2001 and before 2008.
In addition, the Act allows health FSAs to provide for qualified reservists distributions of all or a portion of the health FSA account balances of participants who are reservists called to active duty for 180 days or more. The Act provides that distributions may be made at any time from the date of the call to duty through the last date on which reimbursements may be made for the plan year in which the call to duty occurred. This provision is intended to provide a way for plans to help reservists avoid unwanted forfeitures under the "use-or-lose" rule.
Differential Pay
Some employers voluntarily agree to continue paying the compensation that service members would otherwise have received from the employer during their active duty. Under pre-Heroes Act law, such "differential pay" was not considered wages for federal tax withholding purposes. Under the Heroes Act, differential pay is subject to withholding, and employers are required to include the amount of differential pay as plan compensation and wages for 401(k) and other qualified plans. The result, for example, is that an employee receiving differential pay can elect to contribute a portion of that pay into a 401(k), with the employer matching that contribution on the same basis as other employees' contributions.
Previously, employees who returned to their same employers after military service were allowed to make retroactive contribution to their retirement savings plan, and employers were required to match those retroactive deferrals to the same extent that they matched other workers' contributions during the period of military service. This provision applies to differential pay paid after December 31, 2008.
It is important to point out that retroactive 401(k) plan amendments intended to comply with the Act's provisions must be adopted no later than the last day of the first plan year beginning on or after January 1, 2010.
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