HEART Amendment

In 2008, President Bush signed the HEROES Earnings and Assistance Relief Tax Act (HEART), which provides a number of savings-related benefits to employees serving in the military affecting most qualified retirement plans. While some provisions of HEART took effect retroactively to 2007, most employers have until the last day of the 2010 plan year to amend plans for the following HEART provisions.

Qualified Reservist Distributions: HEART makes permanent a temporary provision of the Pension Protection Act of 2006 allowing military service members to take penalty-free “qualified reservist distributions” and later re-contribute these amounts to IRAs. This applies to deferral distributions made to military service members who were called to active duty for at least 180 days after September 11, 2001. Qualified reservist distributions may be re-contributed to an individual retirement account (IRA) within two years after the end of their active military service.

Death and Disability: For participants who are called to active duty and die while on active duty, they will be treated as if they were re-employed on the day before their death and then terminated because of death on the following day. This provision applies to all beneficiary rights (e.g., 100% vesting at death) and vesting service credit for the time of military service but not to benefit accrual (e.g., employer contributions).

In addition, the employer may elect to give benefit accruals (e.g., employer profit sharing contributions), to ignore breaks in service, or to make a matching contribution for the service member (even if no deferral was made to the plan). Also optional is vesting service credit for the time of military service upon disability during active military service, unlike the required vesting service credit upon death feature mentioned just above.

Differential Wage Payments: An employer may provide differential wage payments, sometimes referred to as “optional pay” to employees who are called to active duty. Differential pay is typically used to make up the difference between active duty pay and what the employee would normally have made if not called to active duty. These optional employer payments are treated as W-2 income and, depending on how your plan is designed, may be excluded from compensation for certain plan purposes but must be included for nondiscrimination testing and certain other plan purposes.

Deemed Severance from Employment: A military service member called to service for more than 30 days will be considered to have a deemed severance of employment. If the plan permits this as a triggering event, the military service member may take a distribution of deferrals, ADP safe harbor contributions, qualified non-elective or qualified match contributions under a 401(k), 403(b) or 457(b) plan. A distribution due to a deemed severance from employment will follow the same rollover, taxation and penalty rules as a normal distribution due to severance from employment.

Military service members that take a distribution based on a deemed severance from employment cannot make elective deferrals for six months beginning from the date of distribution. If the service member is eligible to take and the plan allows for qualified reservist distributions, the distribution will be considered a qualified reservist distribution and deferrals will not be suspended.

Contact your company’s retirement plan document provider before the December 31, 2010, deadline, to obtain an appropriate HEART amendment and discuss how this legislation may impact your qualified retirement plan.

Source: Ascensus. Baden Retirement Plan Services is an Ascensus company. Ascensus is a division of Crump Group, Inc., a leading provider of retirement services and diversified wholesale insurance distributor.Visit www.ascensus.com and www.badenrps.com for more information.