On May 22, 2008, Congress passed the Heroes Earnings Assistance and Relief Tax Act of 2008 (also called the Heroes Act or the HEART Act), and President Bush is expected to sign the act into law in the near future. The Heroes Act requires employers to provide certain additional benefits to employees on qualified military leave and permits employers to adopt some optional provisions that would be beneficial to service personnel.
The act provides additional protection for survivors of military personnel who die or are disabled during qualified military service, and thus are unable to return to work and use their Uniformed Services Employment and Reemployment Rights Act (USERRA) reemployment rights. It also standardizes the treatment of “differential pay” as taxable wages and as compensation for retirement plan purposes.
The employee benefits provisions of the Heroes Act generally apply to employees performing qualified military service as defined in Internal Revenue Code Section 414(u). This is the same definition of qualified military service currently used under USERRA laws that apply to qualified retirement plans. The provisions of the Heroes Act must be applied consistently and on a nondiscriminatory basis to all employees in qualified military service.
The following chart summarizes the most significant provisions of the Heroes Act that apply to employee benefit plans and includes information about mandatory and optional action steps that employers may need to take.
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Plan(s) Affected |
Mandatory or Optional? |
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| Section 104(a): Requires that additional death benefits (excluding benefits earned during military service) that would have applied if the participant had returned to employment and then died be provided to survivors of plan participants who die while performing qualified military service. For example, if the plan provides for 100 percent vesting upon death, the participant's plan benefits would become 100 percent vested. Likewise, some plans provide for special death benefits for participants who die while actively employed; those benefits would be extended to persons in qualified military service. | Qualified retirement plans (including 401(k) plans), 403(b) plans and government 457(b) plans.
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Mandatory | Apply these rules in practice to deaths occurring on or after Jan. 1, 2007.
Amend plan by the last day of the 2010 plan year (2012 for governmental plans). |
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Section 104(b): Provides that a plan may, for benefit accrual purposes, treat a participant who dies or becomes disabled while performing qualified military service as if the individual had returned to employment on the day before the death or disability and then died or became disabled on the actual date of death or disability. This would allow the participant or his or her beneficiaries to receive all or part of the benefit accruals that the plan is required to provide under USERRA to reemployed veterans. |
Qualified retirement plans (including 401(k) plans), 403(b) plans, 457(b) plans and Simplified Employee Pension (SEP) plans.
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Optional
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If this optional provision is adopted: The plan may apply these rules in practice to deaths occurring on or after Jan. 1, 2007, or a later effective date. Amend plan by the last day of the 2010 plan year (2012 for governmental plans). |
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Sections 105(a) and 105(b): If an employer elects to pay differential pay to an employee during a period of qualified military leave, the Act requires that this differential pay be treated as compensation for plan purposes and as wages for income tax withholding purposes.
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Qualified retirement plans (including 401(k) plans), 403(b) plans, 457(b) plans, SEP plans and IRAs.
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Mandatory |
If you pay differential pay to employees on qualified military leave: Treat differential pay as wages for income tax withholding purposes for payments made after Dec. 31, 2008. Treat differential pay as compensation for plan purposes beginning with the 2009 plan year. Amend plan by the last day of the 2010 plan year (2012 for governmental plans). Note that treating differential pay as eligible compensation for plan purposes is currently an optional provision in the final regulations under Internal Revenue Code Section 415. If a plan has not yet been amended for these provisions, the plan sponsor may wish to consider including this provision now. |
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Section 105(b): An elective contribution plan must treat an employee on active military duty for more than 30 days as having terminated employment for purposes of taking a distribution of his or her tax-deferred contributions. This is available even though the employee is still considered employed while receiving differential pay. The employee's tax-deferred contributions must be suspended for six months after the distribution date. |
Qualified retirement plans (including 401(k) plans), 403(b) plans and 457(b) plans.
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Mandatory |
The plan must apply these rules in practice in years beginning after Dec. 31, 2008. Amend plan by the last day of the 2010 plan year (2012 for governmental plans). |
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Section 107: Permanently waives the 10 percent early withdrawal penalty on early distributions to qualified reservists called to active duty.
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Qualified retirement plans (including 401(k) plans), 403(b) plans and IRAs.
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Mandatory |
Apply these rules in practice to employees called to active duty on or after Dec. 31, 2007. This makes permanent the exception available under the Pension Protection Act through Dec. 31, 2007. No plan amendment required. |
| Section 114: Permits a tax-free distribution from a health flexible spending account in a cafeteria plan to an employee who is a qualified reservist and is called to active military duty for a period of more than 179 days. |
Health flexible spending accounts (cafeteria plans). |
Optional
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Apply these rules in practice to distributions occurring on or after the date of the enactment of the Heroes Act. |