HEART ACT (Heroes Earnings Assistance and Relief Tax Act) Signed Into Law

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The Heroes Earnings Assistance and Relief Act of 2008, which was recently signed into law by President Bush, is a new law whose purpose is to address the payments made to individuals who have been called to active military service.
Some employers would voluntarily continue to pay active service members during their periods of active duty. These payments were not subject to tax withholdings nor were required to be treated as compensation for retirement plan purposes, however there was not a standardized method of handling these payments.

Under the HEART Act, beginning January 1st, 2009 differential wage payments will be subject to income tax withholding and must be treated as compensation for purposes of retirement plans.

The Act allows but does not require Plan Sponsors to amend their Cafeteria Plan to make a cash distribution called a Qualified Reservist Distribution of unused FSA Medical benefits without disqualifying the entire plan.
Pertinent Points:
  • Only members of a reserve component (a member of the Army National Guard; US Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; Air National Guard of the United States; or the Reserve Corps of the Public Health Service) can receive a Qualified Reservist Distribution.
  • The Reservist must be called or ordered to active duty for 180 days or more or for an indefinite period of time.
  • The distribution applies to the Plan Year in which the Reservist is called or ordered to active duty.
  • The amount of the distribution is for "all or a portion of the balance in the employee's account".
  • The distribution may be as early as the date of the order but no later than the "last date that reimbursements could otherwise be made for the plan year".
  • The distributions may be subject to income tax.
  • Once a distribution is made the Reservist cannot submit expenses for reimbursement to the FSA Medical Benefit.
There are several points that are not clear.
  • Does the amount of the distribution for "all or a portion of the balance in the employee's account" refer to the Account Balance or Available Credit?
  • Does "the distribution must be paid no later than the last date that reimbursements could otherwise be made for the plan year" refer to the last day of the plan year or the last day of the Run-Out period for the plan year?
  • Are the distributions subject to income taxation?
These questions will undoubtedly be clarified by the IRS in the future. In the meantime, the employer should consult with legal counsel to determine whether to amend the plan and what modifications to include. A sample amendment and Summary of Material Modification template is available for download via inTouchSM.
To learn more about how this will affect retirement and cafeteria plans, click here.

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