In June, President Bush signed the Heroes Earnings Assistance and Relief Tax Act (also known as the HEART Act or the Heroes Act). Following on the heels of this year’s expansion of the , which granted special leave benefits for family members of active-duty military personnel, the HEART Act provides reservists with additional benefits.
In this case, the new rules focus on reservists’ retirement benefits and pay differentials many employers offer to employees who serve in the Guard and reserves.
Retirement benefits & employment status
The new law requires retirement plans to treat reservists who die while on active duty as if they worked for their employers on the day they died, as long as they were participating in qualified retirement plans such as 401(k)s and 403(b)s.
For instance, if the plan offers accelerated vesting or an ancillary life insurance benefit, the employee’s beneficiary must receive the same benefit that would have been provided if the reservist had been working for the employer at the time of death.
The law’s retirement provisions apply retroactively, covering deaths or disabilities occurring on or after Jan. 1, 2007.
Withdrawals from retirement plans
The new law also allows reservists on active duty for 180 days or more to make withdrawals from their qualified retirement plans without the 10% tax penalty they would normally face.
The withdrawals are considered a loan, and the reservists have two years to repay the plan to avoid the penalty. Similarly, reservists who participate in cafeteria plans are exempt from the “use it or lose it” provisions of flexible spending accounts.
Reservist pay differentials
Employers that pay reservists the difference between their regular pay and what they earn in the reserves while they are on active duty face some new rules as well.
Under the act, those differential payments are subject to income tax withholding. Additionally, employees may elect to make retirement plan contributions from their differential pay. Employers must give reservists receiving differential pay any pay-based benefit that other employees receive.
Employers are not required to pay differential pay, but must follow these rules if they do.
Employers with 50 or fewer employees may claim a 20% tax credit for pay differentials they provide. However, they may not deduct the cost of pay and benefits until it exceeds the 20% threshold.
Pay differential rules take effect Jan. 1, 2009.
In total, the new act requires employers to amend their existing benefit plans to comply with the law, and make changes in future years.
Advice: Consult with your plan administrators to ensure your current and future plans comply.