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Do Your Benefit Plans Comply With the HEART Act?

09.03.2008

 
The recently enacted Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) provides tax relief and protections to members of the armed forces. This Act impacts a number of employee benefit plan provisions, and some provisions of the HEART Act will require employers to amend their benefit plan documents.

Qualified Retirement Plan Requirements

  • The HEART Act requires a qualified plan to provide the survivors of a participant who dies while performing ‘qualified military service’ under USERRA any additional benefits (other than benefit accruals relating to the period of qualified military service) that would be provided under the plan had the participant resumed employment with the employer and then died. This provision applies retroactively to deaths occurring on or after January 1, 2007.
  • Differential wage payments (employer supplements to military pay) will be subject to income tax withholding and must be included in the employer plan’s definition of ‘compensation’ beginning January 1, 2009.
  • Beginning January 1, 2009, a participant performing ‘qualified military service’ under USERRA for more than 30 days is treated as having severed employment for purposes of the limitation on in-service distributions. A participant who takes a distribution under this provision may not make additional contributions to the plan for 6 months following the distribution.
  • The HEART Act makes permanent the temporary exception provided in the Pension Protection Act of 2006 (PPA) to the 10% pre-age 59½ early withdrawal penalty for qualified reservists who serve more than 179 days of active duty and take a qualified plan distribution during this period of active duty.
  • Subject to certain conditions designed to ensure the benefits are fairly awarded, the HEART Act allows a plan to provide for continued benefit accruals or contributions for a participant who cannot be reemployed due to death or disability suffered during qualified military service on or after January 1, 2007.

Although plan documents do not have to be amended for the HEART Act until the last day of the first plan year beginning on or after January 1, 2010 (2012 for governmental plans), employers and plan administrators should ensure that their plans are operationally compliant by the effective dates discussed above.

Flexible Spending Arrangements. The HEART Act also amends Code Section 125 to permit a full or partial distribution to a qualified reservist of the unused amounts in a healthcare reimbursement account. This provision was effective on June 17, 2007 when the HEART Act became law, so employers that want to provide this distribution option to eligible participants can amend their plans now.

Taxation of Deferred Compensation of Expatriates. Tax qualified accounts (e.g., retirement plans, IRAs, 529, etc.) become taxable to certain U.S. citizens who relinquish U.S. citizenship and certain long-term U.S. residents who relinquish residency, and payors are required by the HEART Act to withhold income tax on payments from such accounts at a 30% rate in lieu of any other applicable withholding requirements. This provision was immediately effective when the HEART Act became law. While the IRS is expected to issue guidance on how this requirement is to be implemented, plan administrators should seek guidance before making a distribution to any expatriate to ensure compliance with these new requirements.

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