The Skinny on the HEART Act

AHI's Benefit Alert provides some useful information on The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) Act.  The Act provides benefits preferences to employees who are in the National Guard and Reserves. It may also impact 401(k) plans and health flexible spending accounts (FSAs).

Here are some of the HEART Act's highlights:

The HEART Act supplements [USERRA and the tax code].

Make-up contributions. Employees returning from military service must be allowed to contribute pre-tax make-up contributions into their 401(k) accounts. Special rules also apply to employer matching contributions and employee after-tax contributions. Under the HEART Act, for years beginning after December 31, 2008, military differential pay — the difference between employees' regular pay and military pay — must be treated as wages for these pre-tax make-up contributions, employer matching contributions, and employees' after-tax contributions . . . .

Distributions on account of severance of employment. Normally, employees can't take in-service distributions from their 401(k) plans. Under the HEART Act, employees who are called to active military service for a period exceeding 30 days are considered severed from employment. Employees, therefore, may receive distributions of their pre-tax amounts . . . .

Qualified reservist distributions. The 2006 Pension Protection Act allowed employees who are called to active military service for 180 days or longer, or for an indefinite time, to take penalty-free qualified reservist distributions from their 401(k) plans. The distributions must be made during the period that begins on the date employees receive their orders or call to duty and ends at the close of their active military service . . . . The HEART Act makes this provision permanent.

Survivor benefits and disability retirement benefits. The HEART Act adds new mandatory tax qualification requirements for 401(k) and other plans. Under the new requirement, plans can't discriminate in paying survivor benefits. If, for example, a plan accelerates vesting, ancillary life insurance benefits, or other survivor benefits that are payable upon an employee's death, those same benefits must be available to survivors when employees die during military service.

The HEART Act has additional provisions dealing with: benefits accrual under USERRA's retroactive benefits accrual rules, distributions from health flexible spending accounts, and mental health parity.

PS