On June 17, 2008, President Bush signed into law the Heroes Earnings
Assistance and Relief Tax Act of 2008 (the “HEART Act”), which provides several
employee benefit-related advantages to eligible military personnel, as well as
Retirement Plan Requirement for Death While Performing Qualified Military
The HEART Act requires tax-qualified retirement plans to add a provision
addressing the impact of a participant’s death while performing “qualified
military service” (meaning service in the uniformed services of the United
States for which an individual has legal reemployment rights). In the event of
such a death, the participant’s “survivors” must be entitled under the terms of
the plan to any additional benefits that they would have received had the
participant died while actively employed by the employer. For example, if a plan
provides for accelerated vesting upon the death of a currently-employed
participant, the same accelerated vesting provision would apply if a participant
dies while performing qualified military service.
Presumably the term “survivors” in the Heart Act means a participant’s
designated beneficiary or beneficiaries who survive him or her, or if there are
none, then the person or persons whom the plan specifies to receive benefits in
the absence of any designated beneficiary surviving the participant. The
Internal Revenue Service will have to clarify this, however.
This requirement applies to deaths occurring on or after January 1,
2007. Plan administrators will need to review their records to determine if
additional benefits need to be paid retroactively.
Retirement plan documents must be amended to reflect the new provision
by the last day of the plan year beginning on or after January 1, 2010
(January 1, 2012 in the case of a governmental plan).
This requirement also applies to Section 403(b) tax-deferred annuity
contracts and Section 457(b) eligible deferred compensation plans of
governmental and tax-exempt entities, with the same amendment deadlines.
Benefit Calculation Requirements for Plan Participants Who Die or Become
Disabled While Performing Qualified Military Service
Under the Heart Act, if a plan participant leaves employment with the
employer and cannot return to employment due to disability or death incurred
while performing qualified military service, then for purposes of calculating
benefits or accruals under a qualified retirement plan, Section 403(b) contract
or Section 457(b) plan, the participant can (but need not) be treated as having
been rehired on the date before death or disability and subsequently terminated
on the date of death or disability. This provision must be applied on a
reasonably-equivalent basis to all affected plan participants.
If an employee is treated as rehired and subsequently terminated, as
described above, for purposes of calculating the amount of elective deferrals
and other employee contributions, the average amount the individual actually
deferred or contributed to the plan during the 12-month period of service with
the employer immediately prior to qualified military service should be used. If
the period of service is less than 12 months, the actual length of continuous
service with the employer should be used to calculate the average amount
actually deferred or contributed to the plan.
- This provision is retroactive and applies to all distributions on
account of death or disability occurring on or after January 1, 2007.
- Retirement plans that implement this provision must be amended
accordingly by the last day of the plan year beginning on or after January
1, 2010 (January 1, 2012 for governmental plans).
Differential Pay Treated as Compensation for Retirement Plan Purposes
Some employers choose to continue to pay employees while they are performing
qualified military service. The amount is generally equal to the difference
between their military pay and the amount they would have received from the
employer during the time they perform the qualified military service. This
amount is generally referred to as differential pay. In order to qualify as
differential pay under the HEART Act, the amounts must also be paid by the
employer with respect a period of more than 30 days of active duty.
The HEART Act requires that any differential pay be treated as compensation
for purposes of qualified retirement plans, Section 403(b) contracts and Section
- This requirement is effective for all compensation paid after December
- All affected plans and contracts must be amended to provide for this
requirement no later than the last day of the first plan year beginning on
or after January 1, 2010 (January 1, 2012 for governmental plans).
Qualified Reservist Distributions Under Retirement Plans Made Permanent
The Pension Protection Act of 2006 (the “PPA”) exempted “qualified reservist
distributions” from the 10% additional tax applicable to distributions from
qualified retirement plans, Section 403(a) and (b) annuity plans and contracts
and individual retirement accounts (“IRAs”) between September 11, 2001 and
December 31, 2007. The PPA made qualified reservist distributions available to
individuals called to active duty for a period of more than 179 days and
required that such distributions be paid during the period beginning on the date
the individual is called to active duty and ending on the date he or she
completes active duty. The PPA also allowed individuals who received qualified
reservist distributions to repay the distribution to the Plan within two years
after the completion of active duty. Effective June 17, 2008, the HEART Act
makes permanent the PPA provisions that allow for and govern qualified reservist
In-Service Distributions from Retirement Plans Can Be Made Upon 30 Days of
A plan participant who is on active duty for 30 or more days can be treated
as having a severance from employment and can request and receive an in-service
distribution of all vested amounts to his or her credit in a Section 403(b)
contract or a Section 457(b) plan, and from amounts to his or her credit that
are attributable to salary deferral contributions to a Section 401(k) plan. In
the event of this type of in-service distribution, the participant is prohibited
from making employee deferrals or other contributions to the Plan for a period
of six months following the date of the distribution.
- This requirement is effective January 1, 2009.
- Plan amendments allowing these in-service distributions must be made by
the last day of the plan year beginning on or after January 1, 2010 (January
1, 2012 for governmental plans).
Rollovers of Military Death Benefits to Roth IRA or Education Savings
A rollover of any military death benefit payment can be made to a survivor’s
Roth IRA or to an education savings account. Annual limits on rollovers do not
apply to this type of rollover. For example, certain military personnel
automatically have life insurance coverage under the Servicemembers’ Group Life
Insurance (“SGLI”) program. If a survivor receives an SGLI payment, he or she
can contribute it to a Coverdell education savings account without regard to the
otherwise applicable $2,000 annual limit on contributions.
- This requirement is effective for payments made as to deaths which occur
on or after June 17, 2008.
- Additionally, if rollover contributions are made within one year of June
17, 2008 and as to a death that occurred on or after October 7, 2001, this
provision also applies.
Distributions of Unused Portion of Flexible Spending Accounts Allowed
Effective June 17, 2008, the HEART Act allows a participant in a flexible
spending account (“FSA”) plan to take a distribution from his or her FSA so long
as (1) he or she is a reservist called to active duty for at least 180 days (or
called for an indefinite time period), and (2) the distribution is made during a
period beginning on the day he or she is called to active duty and ending on the
last day of the coverage period of the FSA plan that occurs during the period of
active duty. By amending their plans to take advantage of this provision, plan
sponsors can help FSA plan participants called to active duty avoid the “use it
or lose it” rule generally applicable to these plans.
For example, prior to the HEART Act, if a plan participant elected to
contribute $1,000 to an FSA plan and was subsequently called to active duty
before having used the amount, the amount would have been forfeited under the
“use it or lose it” rule at the end of the FSA coverage period, assuming the
plan participant did not submit claims to the FSA while on active duty. However,
with the enactment of this provision, the reservist can request a distribution
of $1,000 from the account within the specified time period to avoid forfeiting
the amount. This provision of the HEART Act is not required. However, a plan
sponsor may implement this provision by amending its plan accordingly.
Mental Health Parity Requirements for Group Health Plans Extended
The Mental Health Parity Act generally requires that annual or lifetime
dollar limits on mental health benefits be no lower than the dollar limits
applicable to medical and surgical benefits offered by a group health plan or
health insurance issuer which offers mental health coverage in connection with a
group health plan. The HEART Act extends these requirements through the end of
Plan Documentation and Participant Communications
Even though the HEART Act provisions are subject to deferred amendment dates,
plan sponsors should consider whether earlier plan amendments and changes to
summary plan descriptions are appropriate in order to ensure proper
implementation of these changes and timely communication to participants.
For further information or help in analyzing the impact of the HEART Act on
your benefit plans or making the required amendments, please contact any member
of the McGuireWoods
Employee Benefits or
Labor & Employment Teams.