President George W. Bush recently signed into law the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, which provides the following employee benefit-related advantages to eligible military personnel and their families.
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Retirement plan requirements
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.” In the event of such a death, the participant’s “survivors” must be entitled under the terms of the plan to any additional benefits they would have received had the participant died while actively employed by the employer. For example, if the 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.
- 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.
- This requirement also applies to Section 403(b) tax-deferred annuity contracts.
Benefit calculation requirements
Under the HEART Act, if a plan participant leaves employment with the employer and can’t return to employment because of a disability or death incurred while performing qualified military service, then for purposes of calculating benefits or accruals under a qualified retirement plan, the participant can be treated as having been rehired on the date before death or disability and subsequently terminated on the date of death or disability.
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 12-month period of service with the employer immediately before 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.
Differential pay treated as compensation
Some employers choose to continue to pay employees while they’re 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. To qualify as differential pay under the HEART Act, the amounts must be paid by the employer for a period of more than 30 days of active duty. The Act requires that any differential pay be treated as compensation for purposes of qualified retirement plans.
- This requirement is effective for all compensation paid after December 31, 2008.
- 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.
Qualified reservist distributions
The Pension Protection Act of 2006 (PPA) exempted “qualified reservist distributions” from the 10 percent additional tax applicable to distributions from qualified retirement plans. The PPA made qualified reservist distributions available to individuals called to active duty for a period of more than 179 days and required that the distributions be paid during the period beginning on the date the individual was called to active duty and ending on the date she completed active duty. Effective June 17, 2008, the HEART Act makes permanent the PPA provisions for qualified reservist distributions.
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In-service distributions
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 her credit in a retirement plan and from amounts to her credit that are attributable to salary deferral contributions. 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 year beginning on or after January 1, 2010.
Rollovers of military death benefits
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 don’t apply to this type of rollover. This requirement is effective for payments made for deaths that occur on or after June 17, 2008.
Distributions of unused portion of FSA
Effective June 17, 2008, the HEART Act allows a participant in a flexible spending account (FSA) plan to take a distribution from her FSA so long as (1) she is a reservist called to active duty for at least 180 days and (2) the distribution is made during a period beginning on the day 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.
Mental health parity requirements
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 that offers mental health coverage in connection with a group health plan. The HEART Act extends those requirements through the end of 2008.
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 to ensure proper implementation of these changes and timely communication to participants.