The IRS has released guidance regarding certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) that covers the interaction of qualified military service and certain retirement plan benefits and wage benefits. This guidance clarifies the Heart Act rules regarding survivor and disability payments with respect to qualified military service, treatment of differential military pay as wages, distributions from retirement plans to individuals called to active duty, contributions of military death gratuities to Roth IRAs and Coverdell education savings accounts, and employer credit for differential wage payments to employees who are active duty members of the uniformed services. Employers should be aware of this legislation as it could affect employers who hire employees are members of the armed forces.
Survivor and Disability Payments.
An employee who leaves a civilian job for qualified military service is entitled to be reemployed by the civilian employer if the employee returns to employment within a specified period and meets other eligibility criteria. Furthermore, upon reemployment, the employee is entitled to receive certain pension, profit-sharing, and similar benefits that would have been received but for the military service absence.
What is the HEART Act?
The HEART Act requires that, if a participant dies while performing qualified military service, his survivors are entitled to any additional benefits that would have been provided under the plan had the participant resumed employment and then terminated employment on account of death. The types of additional benefits include accelerated vesting, ancillary life insurance benefits, and other survivor’s benefits provided by the plan that are contingent on a participant’s termination of employment due to death.
Differential Military Pay
For remuneration paid after December 31, 2008, differential wage payments (any payment made by an employer to an individual who is in the uniformed services on active duty for more than 30 days that represents all or some of the wages the individual would have received from the employer) are treated as wages for income tax withholding purposes. An individual receiving the differential wage payment is treated as an employee of the employer making the payment; the differential wage payment is treated as compensation; and there is no violation of any nondiscrimination requirements.
However, for purposes of distributions, the individual is treated as having been severed from employment during any period he or she is performing service in the uniformed services. For purposes of determining contributions and benefits under a retirement plan, differential wage payments need not be treated as compensation.
Distributions from Retirement Plans
A taxpayer who receives a distribution from a qualified retirement plan prior to age 59 ½, death, or disability is generally subject to a 10-percent additional tax, except for qualified reservist distributions. A distribution from an IRA or a distribution attributable to elective deferrals to a member of the reserves, who has been called to active duty for a period in excess of 179 days, or an indefinite period, is a qualified reservist distribution. Initially the qualified reservist distribution rules applied to individuals ordered or called to active duty after September 11, 2001, and before December 31, 2007. The HEART Act removed the December 31, 2007, reference; therefore, the qualified reservist distribution rules no longer have an expiration date.
Provisions Affecting Those in Military Service
Life insurance proceeds are also excludable from income. Roth IRA contributions are not deductible, but qualified distributions are excluded from income. Prior to 2008, only qualified rollover contributions could be made to Roth IRAs. However, the definition of a qualified rollover contribution was expanded to allow rollovers from various employer-sponsored plans.
Coverdell education savings account (ESA) contributions are not deductible, and distributions are generally excluded from income up to the amount of the beneficiary’s qualified education expenses. The contribution to a Roth IRA of a military death gratuity, or a life insurance payment, is considered a qualified rollover contribution if made before the end of the one-year period beginning on the date the IRA beneficiary receives the death gratuity or life insurance payment. Similarly, contributions of a military death gratuity or life insurance payment to a Coverdell ESA are treated as qualified rollover contributions. The expansion of the definition of qualified rollovers applies to deaths from injuries occurring on or after June 17, 2008, or to deaths from injuries occurring on or after October 7, 2001, and before June 17, 2008, if the contribution is made no later than June 17, 2009.
Employer Credit for Differential Wage Payments
Eligible small business employers that make differential wage payments after June 17, 2008, and before January 1, 2014, to qualified employees on active duty for more than 30 days may claim a $4,000 maximum credit per qualified employee for a tax year. The amount of any other credit determined with respect to compensation of an employee must be reduced by the amount of this 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 this credit are also taken into account in determining the other credit.