HEART Act Provides Tax Benefits for Military Personnel
On June 17, 2008, the President signed the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 (H.R. 6081
). The HEART Act provides tax benefits and incentives to military personnel. The HEART Act contains many provisions of interest to military personnel and employers in general. However, this bulletin focuses solely on retirement plan-related provisions of particular interest to governmental pension plans.
HEART ACT SECTION 104: Survivor and Disability Payments with Respect to Qualified Military Service
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Death Benefits under USERRA-Qualified Active Military Service. If a plan participant dies while performing USERRA-qualified military service, a qualified plan (401(a) plan)), a 403(b) plan, and a 457(b) plan must treat that plan participant as having died during covered employment with the pension plan. This is a mandatory provision for these retirement plans. See IRC Sections 401(a)(37), 403(b)(14), and 457(g)(4).
These provisions are required and are retroactive. They apply to deaths occurring on and after January 1, 2007. For a governmental plan, plan amendments must be made on or before the end of the 2012 plan year.
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Benefit Accruals in the Case of Death or Disability Resulting from Active Military Service Under USERRA. A retirement plan may treat an individual who dies or becomes disabled (under the terms of the plan) while performing qualified military service as if the individual has resumed employment in accordance with USERRA on the day preceding death or disability and terminated employment on the actual date of death or disability. In order for a plan to provide these benefits, the plan must provide service and benefits on reasonably equivalent terms to all individuals performing USERRA service. See IRC Section 414(u)(9) (as
renumbered by the HEART Act), which also prescribes the amount of employee contributions and elective deferrals that may be made.
These provisions are optional and are retroactive. They apply to deaths and disability occurring on and after January 1, 2007. If these provisions are adopted, a governmental plan must be amended to provide for this on or before the end of the 2012 plan year.
HEART ACT SECTION 105:Treatment of Differential Military Pay as Wages
- Income Tax Withholding on Differential Wage Payments. Any differential pay to an individual in USERRA covered service provided by the employer representing all or a portion of the wages the individual would have earned shall be treated as wages for purposes of IRC Section 3401 (income tax withholding). See IRC Section 3401(h).
This provision is mandatory and is effective in 2009.
- Treatment of Differential Wage Payments for Retirement Plan Purposes. Any employee receiving a differential wage payment shall be treated as an employee of the employer making the payment and the payment shall be treated as compensation for purposes of calculation of contributions and benefits. See IRC Section 414(u)(12). This is also true for individual retirement plans. See IRC Section 219(f)(1) as amended by the HEART Act.
This provision is mandatory and is effective in 2009. For a governmental plan, plan amendments must be made on or before the end of the 2012 plan year.
- Special Rule for Distributions. Notwithstanding the newly enacted rule that a person receiving differential pay is to be considered an employee, for purposes of 401(k), 403(b), and 457(b) plans, an individual shall be treated as having severed employment while in USERRA covered service. Therefore, the individual may take a distribution from the plan. In such a circumstance, the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution.
This provision is mandatory and is effective in 2009. For a governmental plan, plan amendments must be made on or before the end of the 2012 plan year.
HEART ACT SECTION 107:Distributions from Retirement Plans Called to Active Duty
The PPA provision (IRC Section 72(t)(2)(G)(iv)) that expired December 31, 2007, that provided an exemption from the 10% premature distribution tax for "qualified reservist distributions" has been made permanent.
HEART ACT SECTION 109: Contributions of Military Death Gratuities to Roth IRAs and Education Savings Accounts
A rollover of a military death benefit payment can be made to a survivor's Roth IRS or to an education savings account. Annual limits on rollovers do not apply.
If you want more information about the HEART Act, please contact Mary Beth Braitman,
Terry Mumford, Lisa Erb Harrison, or
Katrina Clingerman. We will update the information provided in this bulletin as more guidance is provided. | 