President Bush Approves Heroes Earnings Assistance and Relief Tax Act of 2008

President Bush has signed legislation that improves the retirement plan benefits of employees who serve in the military in part by bridging their military service to their existing civilian employment benefits.

The Heroes Earnings Assistance and Relief Tax Act (HEART Act) of 2008 (H.R. 6081) amends the Uniformed Services Employment and Reemployment Rights Act (USERRA) and applies to participants in a qualified retirement plan, 403(b) plan or 457(b) plan. Among the significant changes:

• Beginning January 1, 2009, “differential wages” -- wages paid by civilian employers to their employees on active duty to make up the difference in what the employees were earning in their civilian jobs -- will be treated as regular taxable income. As such, it will count as compensation for federal income taxes and for retirement plans and allow workers to accrue pension benefits while in the military.
• Participants who die while on military leave will be eligible for all benefits available to participants who die while employed, as if they were rehired the day before they died. This provision applies for all individuals who die during military service on or after January 1, 2007.
• Beginning in 2009, participants on military leave for at least 30 days will be eligible to receive distributions from their retirement plans as though they had been discharged from the military.
• The law makes permanent an exemption waiving the 10 percent early withdrawal penalty that might otherwise apply for reservists who are on military leave for a period of at least 180 days and take distributions from their retirement savings accounts.

While plans may begin taking advantage of the provisions contained in the HEART Act prior to formally amending their plan document, an amendment is required on or before the end of the 2012 plan year for governmental plans.

Optional changes

In addition to the above provisions, plans may credit service time for benefit accruals to participants who were unable to return from qualified military service due to death or disability. This provision can be applied beginning January 1, 2007.

Also, following a period of military service, participants who cannot return to active employment because of death or disability may be treated as having contributed to the plan during their period of military service for the purpose of receiving employer contributions for the time period.

For more detailed information about the HEART Act, please go to HEART Act or to a summary of the new law.