The Internal Revenue Service (IRS) issued Notice 2010-15 on January 20, 2010, which provides guidance regarding certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act).  Of particular interest to administrators of employee benefit plans are the notice's guidance on survivor and disability payments with respect to qualified military service, the treatment of differential wage payments, distributions from retirement plans to individuals called to active duty, and remedial amendment periods.

      Section 401(a)(37) of the Internal Revenue Code of 1986 (Code) requires qualified retirement plans to provide that survivors of a participant who dies while performing qualified military service must be entitled to any additional benefits (other than benefit accruals relating to the qualified military service period) that would have been provided under the plan had the participant resumed employment and then terminated employment upon death.  This requirement also applies to 403(b) plans and governmental 457(b) plans.  The notice clarifies that the types of plan benefits to which Code Section 401(a)(37) applies include accelerated vesting benefits, ancillary life insurance benefits, and other survivor's benefits that depend upon a participant's termination of employment on account of death.  Code Section 401(a)(37) specifically excludes from this list benefit accruals for the period of qualified military service.  However, service credit for the period of the deceased participant's qualified military service must still be provided for vesting purposes.  Section 401(a)(37) is a mandatory provision that is retroactively effective to January 1, 2007.

      Code Section 414(u)(9) permits, but not does require, an employer sponsoring a retirement plan to treat, for benefit accrual purposes, an individual who dies or becomes disabled while performing qualified military service as if the individual had resumed employment in accordance with the individual's USERRA reemployment rights on the day before the death or disability and then terminated employment on the actual date of death or disability.  If a plan treats an individual who dies while performing qualified military service as if the individual had resumed employment, the notice provides that vesting credit must also be provided for the period of the deceased individual's period of qualified military service.  On the other hand, while allowed to do so, a plan is not required to provide vesting credit to a disabled individual even if, for benefit accrual purposes, the plan treats the individual who becomes disabled while performing qualified military service as if the individual had resumed employment.  The provisions of Code Section 414(u)(9) may be applied with respect to deaths and disabilities occurring on or after January 1, 2007, or may be applied beginning as of any date after that.

Differential Wage Payments and Distributions from Retirement Plans

      The notice makes several clarifications with respect to differential wage payments (voluntary payments by an employer of some or all of the wages that a service member would have received but for the military service) and distributions on severance from employment, including the following:

• Differential wage payments are not required to be treated as compensation for purposes of determining contributions and benefits under a plan, but they must be treated as compensation under Code Section 415(c)(3) and Treas. Reg. § 1.415(c)-2(d).

• For a plan that is subject to Code Section 414(s), if a plan's definition of compensation excludes differential wage payments for purposes of determining benefits and contributions under the plan, such definition will not fail to satisfy Code Section 414(s).

• Contributions and benefits provided under a plan as a result of differential wage payments do not need to be included in the plan's nondiscrimination testing.  However, if such contributions and benefits are taken into account, they must not cause the plan to fail the nondiscrimination requirements.

• Code Section 414(u)(12)(B) treats an individual as having been severed from employment while he or she is performing service in the uniformed services.  The notice clarifies that this provision applies to all individuals on active duty for a period of more than 30 days, regardless of whether they are receiving differential wage payments.

• Code Section 414(u)(12)(B) applies only for purposes of the provisions of Code Sections 401(k), 403(b), and 457(d) that permit distributions on severance from employment.  Thus, if an individual is treated as severed from employment under Code Section 414(u)(12)(B), such individual is not necessarily treated as severed from employment under sections of the Code other than Sections 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 403(b)(11)(A), and 457(d)(1)(A)(ii) which permit distributions upon severance from employment.

• A plan may, but is not required to, provide for distributions upon a "deemed severance" from employment under Code Section 414(u)(12)(B).  However, if a plan includes such a provision, the plan must also provide that an individual receiving the distribution may not make an elective deferral or employee contribution during the six month period beginning on the date of the distribution.

• Section 414(u)(12)(B) does not affect the status of an individual who is on active duty for more than 30 days and who has actually had a severance from employment.  For example, if such an individual receives a distribution from a retirement plan under Section 401(k)(2)(B)(i)(I) and returns to employment within six months, he or she would still be permitted to make elective deferrals or employee contributions to the plan before the end of the six month period.
• If a plan provides for both qualified reservist distributions and distributions on deemed severance from employment under Code Section 414(u)(12)(B), a distribution to an individual that could be either type of distribution will be treated as a qualified reservist distribution and, as such, would not be subject to the six month restriction on elective deferrals or the 10 percent additional tax under Code Section 72(p) for distributions prior to age 50½.

• A distribution made in accordance with Code Section 414(u)(12)(B) is an eligible rollover distribution under Code Section 402(c)(4).

Remedial Amendment Periods for Certain Sections of the HEART Act

      The notice clarifies that the remedial amendment period for all of the HEART Act sections discussed above is the same.  This means a plan will be deemed to be in compliance with plan terms if an amendment is made to comply with these HEART Act sections on or before the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012, for governmental plans).  Likewise, the remedial amendment period for Code Section 72(t)(2)(G) (which removes the expiration date for the special rules applicable to qualified reservist distributions) is extended so that it ends no earlier than the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012, for governmental plans).

      The notice also addresses contributions of military death gratuities to Roth IRAs and Coverdell education savings accounts, and employer credit for differential wage payments to employees who are active duty members of the uniformed services.

      The IRS is requesting comments on additional guidance they may issue regarding the aforementioned provisions of the HEART Act.  Written comments should be submitted by April 9, 2010.

      If you have any questions or would like additional information about the notice, please contact Terry Mumford, Mary Beth Braitman, Katrina Clingerman, Lisa Harrison, Chris Sears, Albert Lee, or your Ice Miller LLP employee benefits attorney.