Straight From the Heart: Guidance for Implementing Provisions of the HEART Act

January 29, 2010

In June 2008, the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) was signed into law. The legislation created several new benefits-related advantages for eligible military personnel and their families. We addressed the general provisions of the Act in our July 18, 2008 WorkCite article.

As noted in that article, following enactment, employers and practitioners encountered several vague areas of the law and related questions regarding proper implementation of the Act. In response, the IRS recently issued Notice 2010-15 (the Notice) in Q&A-style form to clarify the initial legislation.

Death or Disability While Performing Qualified Military Service

The HEART Act requires tax-qualified retirement plans (referenced here as Plan or Plans) to include a provision that survivors of a participant who dies while performing qualified military service (QMS) receive the same Plan benefits that would be due to the survivors if the participant had resumed employment with the employer and died the following day. Notice 2010-15 contains several helpful examples of the types of benefits to which survivors could be entitled under the Act. Most notably, the Notice clarifies that:

  • Survivors are entitled to any accelerated vesting or ancillary life insurance benefit provided under the Plan.
  • The Act applies to any benefit due to a survivor that is contingent on the participant’s death.

The Notice did not, however, clarify who qualifies as a “survivor” for purposes of the Act. Employers should note that these special survivor rights only apply in cases where an employee would have been entitled to reemployment rights had he or she returned to employment immediately prior to death.

The HEART Act also requires employers to provide vesting credit for the period of QMS to any person who dies while on QMS. The guidance further states that employers can, but are not required, to count the period of QMS for purposes of benefit accrual under the Plan. Employers should be careful not to confuse this provision with the rule governing participants who return from QMS and are reemployed. In that case, employers are required to give credit for QMS for purposes of calculating the accrued benefit. For employers who choose to count QMS for purposes of calculating benefit accruals, the Notice further clarifies how to calculate the amount of employee contributions.

Also, even though employers are required to grant service credit in the case of a participant’s death while on QMS, this same requirement is not imposed if the participant becomes disabled on QMS. If an employer chooses to count QMS in the case of disability, it must ensure that the provision is applied in a nondiscriminatory manner.

Differential Wage Payments as Compensation

The HEART Act provides that in the case where an employer pays differential wage payments to a participant on QMS, these amounts are treated as compensation for purposes of qualified retirement plans, Section 403(b) contracts, and Section 457(b) plans. The Notice clarifies that employers are not required to treat differential wage payments as compensation in determining a participant’s benefit under a Plan.

Special Distributions for Military Personnel

The Pension Protection Act provides for a special qualified reservist distribution (QRD) from qualified retirement plans, Section 403(a) and (b) annuity plans and contracts, and individual retirement accounts that the HEART Act made permanent. Generally, if a participant is called to active duty for 180 days or more, he or she is entitled to take a distribution attributable to his or her elective deferrals under the 401(k) Plan in which he or she participates. The QRD is not subject to the 10% early withdrawal tax.

The HEART Act added another distribution option for certain participants on QMS. Generally, if a participant is called to active duty for 31 days or more, he or she is entitled to take a distribution from the Plan. An employer who chooses to provide for this special distribution must impose a 6-month restriction on elective deferrals or other employee contributions for any participant who takes such a distribution.

Instances exist where the same distribution could qualify as both a special in-service distribution and a QRD. In such a case, the Notice provides that the distribution should be treated as a QRD which is not subject to either: (a) the 6-month elective deferral / employee contribution limit, or (b) the 10% early withdrawal tax.

Timing of Plan Amendments

The Notice provides that a Plan will be treated as being operated in accordance with Plan terms if an amendment regarding the applicable HEART Act provisions is made on or before the last day of the first Plan Year beginning on or after January 1, 2010 (for calendar year plans, December 31, 2010). Governmental plans need to make the applicable amendments on or before the last day of the first Plan Year beginning on or after January 1, 2012 (for calendar year plans, December 31, 2012).

For assistance in implementing the HEART Act provisions and necessary amendments for your Plans, please contact the authors or any member of the McGuireWoods Employee Benefits or Labor & Employment teams.