Heroes Earnings Assistance and Relief Tax Act
On June 17th, President Bush signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (the Heart Act). This new legislation affects the way payments are made to individuals who are called to serve in active military service and also affects the treatment of reservists on active military duty.
Impact on Benefit Administration:
Voluntary Differential Wage Payments
Effective January 1, 2009, under the Heart act, if you are currently paying compensation that a service member would have otherwise earned during a period of active duty you will need to begin to treat this compensation as taxable income. These wages will be subject to income tax withholding requirements and should be treated as compensation for retirement plan purposes.
Differential pay is defined as compensation paid by an employer to an individual, who is on active duty in the uniformed services for a period of more than 30 days, that represent all or a portion of wages the individual would have received from the employer if the individual had remained in active employment with the employer.
Early withdrawal from 401(k), 403(b) or 457(b) Plans:
For reservists who are called to active duty for at least 180 days, the law makes permanent the exemption from the 10% early withdrawal penalty. They will also be permitted to recontribute the amount withdrawn to an individual retirement account as long as it is within two years of the last day of active service.
Benefits for death or disability during active duty:
If the reservist dies during qualified military service, an employee must be treated as if they died while actively employed. However, this does not apply for purposes of benefit accruals. An employer can voluntarily treat a participant who becomes disabled or dies while on qualified military service as if the participant had resumed employment. So, you can make up any employee contributions that may have been missed based on the participant’s actual contributions during the 12-month period preceding the qualified military service.
Health Flexible Spending Account:
The new law allows (doesn’t require) a healthcare flexible spending account to permit reservists called to active duty to withdraw all or a portion of any unused money (without regard to the normal “use it or lose it”rule). The reservist must be on duty for at least 180 days and distribution of medical FSA funds must be made during the period from the date of call-up until the last day the benefits plan year.
By January 1, 2009:
Review your current company procedures
Modify payroll to treat voluntary differential wage payments as taxable income
Review vestment procedures and benefit accruals for pension plans
Modify employee communications, including retirement plan documents and Medical FSA plan documents
On or before the last day of the first plan year beginning on or before January 1, 2010:
Review and amend all affected plan documents relating to military leave.
BCL Systems, Inc.
The source in Human Resources
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