HEART Act Guidance: IRS Notice 2010-15
Rev. 02/05/10; E-mail Alert 2010-2

On January 10, 2010, the IRS issued Notice 2010-15, providing guidance with respect to the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act).  The HEART Act was signed into law June 17, 2008, and affects qualified plan rules for individuals called into qualified military service. Some of the guidance clarifies provisions of the HEART Act, while other sections reinforce some of the key points. The Notice is in Q&A format and contains 20 questions and answers and an overview of each of the relevant sections.  Following is a list of highlights from the Q&As:

• Code Section 401(a)(37) provides that survivors of a participant who dies while in qualified military service will be entitled to any additional benefits — other than benefit accruals relating to the period of qualified military service — that would be provided if the participant had resumed employment and then terminated employment on account of death. The types of benefits affected include:

  service credit,

  accelerated vesting, (vesting credit is required to be provided)

  ancillary life insurance benefits, and

  other survivor’s benefits contingent on the participant’s death.

  This applies to qualified plans, 403(b) plans and 457(b) governmental plans.

  This is effective for deaths occurring on or after January 1, 2007.

• When determining the amount of death benefits, Code Section 401(a)(37) does not require that benefit accruals (for either DB plan or DC plan) be imputed for the period of qualified military service. However, the plan may optionally provide for this.
• If a participant is not entitled to reemployment rights under USERRA, then the survivor benefits under the HEART Act do not apply.
• Vesting credit is not required to be provided to individuals who become disabled while performing qualified military service, though it may be provided to the extent permitted under other rules, including regulation section 1.401(a)(4)-11(d)(3).
• The prior to service 12-month period's actual deferrals will be used for determining employer contributions (match) upon reemployment. If employed less than 12 months, use the actual time employed.  For disabled individuals, a plan may also base employer contributions on actual make-up deferrals.

HEART Section 105 – Treatment of differential military pay as wages
Definition: Differential wage payment is defined in Code Section 3401(h) as any payment that:

“…(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 USERRA) 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.’’

Effective for remunerations paid after December 31, 2008.

New Code Section 414(u)(12) provides for qualified plan contributions to be made on differential pay, and that differential pay amounts are to be treated as if the individual were an employee of the employer making the payment. 

• Although differential wage payments are to be treated as compensation, a plan may exclude differential wage payments from the definition of compensation and will not fail to satisfy the Section 414(s) merely because differential wage payments are excluded.
• An individual called into active duty may make a distribution of deferrals (based on a deemed severance concept) as they are considered severed from service after 30 days of active duty. A six-month suspension of deferrals is required after such a distribution. The individual does not have to be receiving differential pay to be eligible to make a distribution. 
• A plan is not required to provide for distributions to an individual with a deemed severance.
• If an individual has a real severance from employment and returns to employment within the six months of taking a distribution of deferrals, they can begin making elective deferrals immediately.
• An individual on active duty who is eligible for both a deemed severance distribution and a qualified reservist distribution (after 179 days on active duty) will have the distribution treated as a qualified reservist distribution. Thus, there will be no 6-month suspension and no 10% premature distribution penalty.
• Deemed severance distributions are eligible rollover distributions, subject to the 20% mandatory withholding.
• Contributions resulting from differential wage payments may be included in nondiscrimination testing.  This is not permitted if the amounts will cause the testing to fail.  If it is decided that these amounts are to be included, they must be included for all employees receiving differential wage payments.

HEART Section 111 – Employer credit for differential wage payments to employees who are active duty members of the uniformed services

The amount of any other credit with respect to employee compensation must be reduced by the amount of the Section 45P credit if:

(1) compensation paid in the current tax year is an expense used directly in determining the amount of the other credit,

(2) military differential wage payments are a type of compensation taken into account in determining the amount of the other credit, and

(3) the military differential wage payments taken into account for the Code Sec. 45P credit are also taken into account in determining the other credit

Remedial Amendment Period
The plan must be amended for the HEART Act by the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012 for governmental plans. Amendment for Section 107, regarding the extension of the qualified reservist distribution after December 31, 2007 is extended to be the same as in the preceding sentence.

The HEART Act created:
Internal Revenue Code Sections 401(a)(37); 414(u)(12) and 3401(h).

These Code Sections are presented below for reference.

Code Section 401(a)(37)
Ҥ401(a)(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.’’

Code Section 414(u)(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).

 

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