The IRS recently released Notice 2010-15, which provides guidance in a question and answer format on certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act"). The Notice addresses the following.
Survivor and Disability Payments -- The HEART Act requires qualified retirement plans and 403(b) plans to provide the survivors of a participant who dies while performing qualified military service with any additional benefits that would have been provided under the plan had the participant resumed employment and then terminated employment on account of death. Additional benefit accruals are not required, but accelerated vesting, ancillary life insurance benefits, and other survivor's benefits provided under the plan that are contingent on a participant's termination on account of death must be provided. An employer also has the option to amend its plan to provided additional accruals to a participant who dies or becomes disabled while performing qualified military service. These provisions are effective on and after January 1, 2007.
Differential Wage Payments -- Some employers pay some or all of the compensation that a service member would have received during the member's period of active duty as if the member had not been called to active duty. Such payments are referred to as "differential wage payments" and previously were not treated as wages for Federal employment tax purposes. The HEART Act amended the Internal Revenue Code to treat differential wage payments as wages for income tax withholding purposes. The Notice clarifies that differential wage payments are not required to be treated as compensation for purposes of determining contributions and benefits under a plan, but they must be treated as compensation for purposes of applying the §415 limits under the Code. Excluding such payments from compensation for plan purposes does not result in a plan's definition of compensation being discriminatory, and benefits based on differential wage payments are not required to be included in nondiscrimination testing.
Qualified Reservist Distributions -- All employees who are on active duty for more than 30 days, regardless of receipt of differential pay, are treated as severed from employment and therefore eligible for plan distributions if so provided by the plan. Distributions may but are not required to be made from a qualified plan, 403(b) plan or governmental 457(b) plan that permits them. A plan that provides for distribution upon a deemed severance from employment must also provide that a participant receiving the distribution may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution. The Notice provides detailed guidance concerning coordination of this deemed severance provision with actual severance under the terms of a plan. These provisions are effective on and after January 1, 2009.
Tax Credit -- The HEART Act added a tax credit for eligible small business employers that make eligible differential wage payments to qualified employees who are on active duty in the uniformed services for more than 30 days. The tax credit is 20% of the sum of the eligible differential wage payments made to qualified employees during the taxable year.
Although the HEART Act provisions are effective at various times, plan amendments are not required until the end of the 2010 plan year.
For additional information about the Notice and the HEART Act, please see the IRS' publication located here.