The 4 basics you need to know about the HEART Act
Last month, President Bush signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) into law to provide enhanced benefits for military personnel.
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 A reservist is also permitted to recontribute the amount withdrawn to an individual retirement account within two years of the last day of active service.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.
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