February 3, 2010

IRS Guidance: HEART Act

The IRS has issued some clarifications (Notice 2010-15) relating to certain provisions of the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008.  Of particular interest:

  • Death of Employee-Participant.  This Notice addresses certain situations in which an employee dies during qualified military service.  The survivors of the deceased employee-participant would be entitled to any additional benefits (other than benefit accruals relating to the period of military service) that would be provided under the employer’s plan, if the employee-participant had resumed employment and then terminated employment on account of death.  The types of benefits include accelerated vesting, ancillary life insurance benefits, and other survivor’s benefits.
  • Service Vesting.  The Notice also clarifies that service vesting must be granted in the event of death or disability while on qualified military service; benefit accrual does not.  The plan can choose to provide benefit accrual to these individuals.  This should not be confused with benefit accrual that must be granted to individuals who actually do return to employment following qualifying military service.
  • Differential pay.  If an employer pays differential pay to individuals on qualifying military service, the differential pay, according to the HEART Act, is treated as compensation, subject to all relevant taxes.  For qualified plan purposes, differential pay is includible in compensation; however, this Notice clarifies that the differential pay need not be considered for purposes of benefit determination.
  • In-service distributions.  The HEART Act provides for qualified reservists distributions (QRD) in the event that an individual is called to military service for 180 days or more.  In addition, a special in-service distribution is available for individuals who are absent from work for at least 31 days.

Plans are not required to include either of these provisions.  However, if the plan adopts either, or both, of the in-service distribution provisions, the special in-service distribution is subject to a restriction that prohibits any elective deferrals for six months, once the individual returns to work.  This Notice clarifies that if an individual qualifies both for the QRD and special in-service distribution, it would be considered a QRD, and subject neither to the 6-month restriction, nor the 10% early withdrawal penalty.

These are just a few of the highlights of the Notice.  Plan sponsors who have individuals called to military service should become familiar with this Notice.

Background articles:

  • HEART Act FSA Cash-out Explained (Benefit Beat, Oct, 2008)
  • “HEROES Act” Signed into Law (Benefit Beat, June, 2008)


The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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