Pentegra :: Heart Act Changes Retirement Rules for Military



HEART Act Changes Retirement Plan Rules for those in Military Service

On June 17, 2008, the Heroes Earnings Assistance and Relief Tax ("HEART") Act became law. The Act makes a number of significant changes to the treatment of military reservists under employee benefit plans. The Internal Revenue Service requires all qualified defined contribution and defined benefit plans to amend no later than the last day of the 2010 plan year to incorporate the provisions of the HEART Act. You should contact the party that is responsible for maintaining your document to ensure that your plan is amended in a timely manner. If you have any questions, feel free to call your Plan Consultant at 1-800-872-3473.

This article summarizes those mandatory changes as they apply to qualified defined benefit and defined contribution plans. In each case, the HEART Act changes are triggered by qualified military service, as that term is defined in the Uniformed Services Employment and Reemployment Rights Act ("USERRA"), i.e. service in the uniformed services, including active duty, active-duty training, and full-time service in the National Guard.


Survivor Benefits. The Act imposes a new requirement that applies when a participant dies while performing qualified military service. In such a case, qualified plans, 403(b) plans, and governmental 457(b) plans must pay any death benefit under the plan as if the participant had returned to work and then terminated employment on account of death. Thus, if the plan provides accelerated vesting or ancillary life insurance benefits to participants who die inservice, it must also provide those benefits to participants who die while performing qualified military service.

The Act does not require plans to pay any benefit the participant would have accrued during the period of military service - though (as discussed below) plans may do so voluntarily. This change is effective with respect to deaths occurring on or after January 1, 2007.

Treatment of Differential Pay. Many employers continue paying a portion of a reservist's wages when he or she is called to active duty. The Act does not require employers to offer such "differential pay," but it clarifies the tax treatment of these amounts and imposes a new rule concerning their treatment for benefit accrual purposes. As defined in the HEART Act, differential pay is any payment an employer makes to an individual who is on active duty for more than 30 days that represents all or part of the wages the individual would have received had he or she continued working for the employer. Under prior law, such pay was not treated as wages for purposes of income tax withholding, and it was treated as compensation under retirement plans only if the plan so provided. Under the Act, however, differential pay must be:

  • included as wages (and therefore reported on Form W-2, rather than Form 1099), effective January 1, 2009; and
  • treated as compensation for purposes of benefit accruals under any plan subject to USERRA beginning, with the 2009 plan year.

Some plan sponsors worried that differential pay may cause an inadvertent violation of the Tax Code's nondiscrimination and minimum coverage requirements. The Act addresses these concerns by creating a safe harbor. Plan contributions and benefit accruals required under the HEART Act's differential pay rules will be exempt from the Tax Code's minimum coverage and nondiscrimination rules if all the employer's employees are entitled to differential pay on reasonably equivalent terms, and all employees eligible to participate in a retirement plan maintained by the employer are entitled to make contributions based on such differential pay on reasonably equivalent terms.

Deemed Severance from Employment. The Act's final mandatory rule is intended to facilitate "in-service" distributions from defined contribution plans. Such plans must treat participants receiving differential pay as having severed employment for purposes of distributions of the following amounts:

  • 401(k) elective deferrals;
  • salary reduction amounts under Section 403(b) plans;
  • all contributions to 403(b)(7) custodial accounts; and
  • amounts deferred under eligible Section 457(b) plans.

If a reservist receives an in-service distribution of such amounts, he or she will not be permitted to make elective deferrals or employee contributions to the plan for the six months following the distribution.