In ESOP Planning 2009: Plan Documents and Disclosures we discussed how the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) was one of the major pieces of Employee Benefits Legislation enacted in 2008. Some of the changes were retroactive to 2007 and others became effective January 1, 2009. An amendment must generally must be adopted by the end of the 2010 plan year.
The IRS issued IRS Notice 2010-15 – Miscellaneous HEART Act Changes in January and discussed the guidance in the Retirement News for Employers – Winter 2010 Edition:
Death Benefits
The Act added Code §401(a)(37) that imposes a new requirement on 401(a) plans, 403(b) annuities and 457(b) governmental plans. The Act requires these plans to treat participants who died on or after January 1, 2007, while performing qualified military service (QMS) as being re-employed prior to death and, therefore, entitled to certain additional benefits provided under the plan, such as:
- accelerated vesting;
- ancillary life insurance benefits; and
- other plan survivor benefits that are contingent on a participant's termination of employment due to death.
The Notice provides:
- The plan's additional death benefits are not required to include benefit accruals (if a defined benefit plan) or contributions (if a defined contribution plan) for the QMS period;
- The plan must provide service credit for vesting purposes for the deceased participant's QMS; and
- A participant's survivors are not entitled to Code §401(a)(37) death benefits unless the participant was entitled to reemployment with the employer maintaining the plan following his or her QMS.
Contributions or Benefits for Time of Military Service
Other clarifications in the Notice relate to §104(b) of the Act that permits certain plans to treat participants who die or become disabled on or after January 1, 2007, while performing QMS as:
- being rehired the day before his or her death or disability; and
- then terminating employment on the date of death or disability.
If the plan uses this provision, then it may provide benefit accruals or contributions for the period when the participant was absent as would have been required by the Uniformed Services Employment and Reemployment Rights Act (USERRA) had the participant actually been rehired. However, the plan must provide the same benefits or contributions to all similarly situated participants on a reasonably equivalent basis.
Differential Pay (Also see Differential Military Pay as Wages.)
The Notice also describes how a plan treats differential pay that an employer may provide after December 31, 2008, for retirement plan purposes. Differential pay is the difference between a person's pay from the employer and his or her military pay. For example, a plan does not have to treat differential pay as compensation to determine contributions and benefits but it must consider the differential pay when determining the total amount of employer and employee contributions under Code §415(c)(3).
Plan Distributions
The Notice clarifies that if a plan allows distributions upon severance of employment, it may treat an individual's service in the uniformed services while on active duty for more than 30 days as a deemed severance from employment under Code §§401(k), 403(b) and 457(d) and allow a distribution. If so, the plan can't permit the individual for a 6-month period following the date of the distribution to make:
- an elective deferral to the plan; or
- an employee contribution to the plan.
Required Plan Amendment Date
Some of the Act's provisions were effective retroactively to January 1, 2007, while others were effective for later years. The Notice extends the remedial amendment period during which a plan can make certain amendments retroactively effective to comply with the Act's provisions. Generally, sponsors must amend their plans for HEART Act provisions by the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012, for governmental plans).
The IRS is considering additional guidance on various sections of the Act and requests comments from the public.
The HEART Act created the following Internal Revenue Code Sections:
(37) Death benefits under userra-qualified active military service.— A trust shall not constitute a qualified trust unless the plan provides that, in the case of a participant who dies while performing qualified military service (as defined in section 414 (u)), the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan had the participant resumed and then terminated employment on account of death.
(12) Treatment of differential wage payments
(A) In general
Except as provided in this paragraph, for purposes of applying this title to a retirement plan to which this subsection applies—
(i) an individual receiving a differential wage payment shall be treated as an employee of the employer making the payment,
(ii) the differential wage payment shall be treated as compensation, and
(iii) the plan shall not be treated as failing to meet the requirements of any provision described in paragraph (1)(C) by reason of any contribution or benefit which is based on the differential wage payment.
(B) Special rule for distributions
(i) In general Notwithstanding subparagraph (A)(i), for purposes of section 401 (k)(2)(B)(i)(I), 403 (b)(7)(A)(ii), 403 (b)(11)(A), or 457 (d)(1)(A)(ii), an individual shall be treated as having been severed from employment during any period the individual is performing service in the uniformed services described in section 3401 (h)(2)(A).
(ii) Limitation If an individual elects to receive a distribution by reason of clause (i), the plan shall provide that the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution.
(C) Nondiscrimination requirement
Subparagraph (A)(iii) shall apply only if all employees of an employer (as determined under subsections (b), (c), (m), and (o)) performing service in the uniformed services described in section 3401 (h)(2)(A) are entitled to receive differential wage payments on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the employer, to make contributions based on the payments on reasonably equivalent terms. For purposes of applying this subparagraph, the provisions of paragraphs (3), (4), and (5) of section 410 (b) shall apply.
(D) Differential wage payment
For purposes of this paragraph, the term "differential wage payment" has the meaning given such term by section 3401 (h)(2).
(h) Differential wage payments to active duty members of the uniformed services
(1) In general
For purposes of subsection (a), any differential wage payment shall be treated as a payment of wages by the employer to the employee.
(2) Differential wage payment
For purposes of paragraph (1), the term "differential wage payment" means any payment which—
(A) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) while on active duty for a period of more than 30 days, and
(B) represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer
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