Many of the provisions of the act have an impact on how HR managers and their employers deal with employees on active duty. Here are the four key provisions:

Early withdrawal from 401(k), 403(b) or 457(b) Plans The new law makes permanent the exemption from the 10% early withdrawal penalty for withdrawals by reservists called to active duty for at least 180 days. A reservist is also permitted to recontribute the amount withdrawn to an individual retirement account within two years of the last day of active service.

Employment benefits for death or disability during active duty. In case of death during qualified military service, an employee must be treated as if he or she had died while actively employed (but not for purposes of benefit accruals). Many plans provide for accelerated vesting or ancillary death benefits upon death during active employment. As a result, plan administrators need to determine if this new requirement will retroactively vest any survivor benefits. This requirement applies to qualified plans, 403(b) plans and 457(b) plans.

The act also permits, but does not require, plans to treat a participant who dies or becomes disabled while performing qualified military service to be treated as if the participant had resumed employment. This will result in participants’ being credited with their time in military service for benefit accrual purposes. In addition, the act permits the employer to make up any employee contributions missed by such participants based on the participants’ actual contributions during the 12-month period immediately preceding the qualified military service.

Treatment of differential pay. Effective January 1, 2009, differential wage payments made to military personnel must be treated as W-2 wages (previously, these amounts were reported on Form 1099). As such, these payments are subject to federal income tax withholding and must be treated as compensation for determining contributions and benefits under the employer’s retirement plans.

An individual in qualified military service for more than 30 days and receiving differential pay must be treated as having a severance from employment, and therefore is eligible to receive a distribution of elective deferrals. However, if the individual takes a distribution, he or she will be barred from making elective deferrals or employee contributions for six months. This provision is effective for plan years beginning after December 31, 2008.

Health Flexible Spending Account payouts. The effective immediately, the Act allows – but doesn’t require — a healthcare flexible spending account to permit reservists called to active duty for 180 days or more to withdraw all or a portion of any unused money (notwithstanding the normal “use it or lose it” rule). The distribution of these funds must be made during the period from the date of call-up until the last day the benefits could normally be reimbursed for the plan year.

None: 72%

1 to 5: 23%

More than 5: 5% 

If you have employees who go on active duty or are reserve members who could be called into active duty, stay abreast of the two military-related changes to the Family and Medical Leave Act:

Service Member Caregiver Leave
FMLA leave for this purpose can be up to 26 weeks (rather than the standard 12 weeks), and is available to individuals who may not be family members under the current definition in the FMLA, and can be related to conditions that may not be “serious health conditions” as previously defined by the FMLA.  An employee who is a spouse, son, daughter, parent or nearest blood relative to a member of the Armed Forces who is being treated for, recuperating from or is on the temporary disability retired list due to a serious injury or illness is entitled to a total of 26 work weeks of leave during a 12-month period to provide care for the service member. 

Note that “serious injury or illness” is defined in the amendment as an injury or illness incurred in the line of active duty that may render the member medically unfit to perform the duties of the member’s office, grade, rank or rating.  This leave is only available during a single 12-month period.  The U.S. Department of Labor has stated that employers need to comply with this portion of the amendment immediately and will be issuing regulations in the future.  In the meantime, employers need to use “good faith” in providing Service Member Caregiver Leave. 

Family Leave Due to Call to Active Duty
Employees also are entitled to FMLA leave due to a “qualifying exigency” arising out of the fact that a spouse, son, daughter or parent is on active duty or has been called or notified about an impending order to active duty in support of a contingency operation. 

Contingency operations involve actions, operations or hostilities against enemies of the United States or opposing forces or active duty during a war or national emergency.