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The Heroes Earnings Assistance and Relief Tax (HEART) Act was enacted in June. It provides new benefits to military personnel while extending other benefits that had expired. Some of the provisions in the Act are voluntary while others are mandatory. Among the key benefit provisions are the earliest date on which such contributions can be reasonably segregated from the employer’s assets,
- Required Survivor Benefits. If a participant in a qualified retirement plan, 403(b) plan or 457(b) plan dies any time after 2006 while performing military service, the participant’s beneficiaries are entitled to the benefits that would have been provided had the participant resumed employment and died later. Potential benefits include accelerated vesting, ancillary life insurance and any other survivor benefits that would normally be conditioned upon death while in active employment. For example, assume a retirement plan provides 100% vesting for participants who die while actively employed with the plan sponsor. If a participant is called to active duty and then dies, his or her beneficiaries will be entitled to benefits that are fully vested. This provision is effective retroactive to January 1, 2007.
- Optional Benefit Accruals. Under a law that has been around for some time (known as USERRA), an employee who returns to active employment following military service is entitled to make up contributions that were missed while away on duty. But USERRA did not provide similar benefits for those participants who could not return to active employment because of death or disability while in qualified military service. The HEART Act permits an employer to treat such an employee as having returned to active employment on the day before death or disability. If a plan sponsor includes this elective provision in its retirement plan, the provision must be applied on a uniform and nondiscriminatory basis.
- Penalty-Free Withdrawals. The Pension Protection Act of 2006 (PPA) permitted qualified reservists (those called to active duty for 180 days or more) to receive a distribution from a 401(k), 403(b) or similar arrangement without triggering a 10% early distribution penalty. The PPA provision was limited to those called to active duty before December 31, 2007. HEART removes the date restriction and makes the provision permanent.
- Differential Pay. A differential payment is a voluntary employer payment to an employee called to active duty for more than 30 days. It represents the difference between the compensation an employee would have received if not called to duty and the compensation received for military duty. Such payments have generally been reported on Form 1099 and have not been treated as W-2 wages. Under HEART, differential wage payments made after 2008 for an active duty period of more than 30 days are treated as wages for income tax withholding purposes. HEART provides for these post-2008 payments are to be treated as compensation for plan purposes, thereby allowing an employee to potentially make 401(k) or 403(b) contributions from differential pay. Such contributions would reduce the amount of make up contributions that an employee could otherwise make under USERRA after returning to regular employment with the plan sponsor. In addition, the law provides certain small employers with a tax credit of 20% of the first $20,000 of differential wage payments per employee.
- Optional Cafeteria Plan Provisions. Plans may be amended to permit distribution of unused benefits from medical Flexible Spending Accounts (FSAs) to reservists called to active duty for a period of more than 179 days, or an indefinite period. Distributions must be made after the individual is called to active duty but before the last date on which reimbursements under the FSA could otherwise be made for the plan year that includes the date the individual was called up. This provision would apply to distributions made after June 17, 2008. It is anticipated these distributions will be taxable, but that beats forfeiting an unused balance under a cafeteria plan’s “use it or lose it” rules.
Coming Soon to Defined Contribution Plans – Next Round of Plan Restatements
The latest versions of the RubinBrown defined contribution prototype plan and our volume submitter plan (through Corbel) have been approved by the IRS, and we are beginning to draft restatements for plan document clients. This next round of required restatements is known as the “EGTRRA restatement” cycle. Plan restatements need to be completed by April 2010. This is the time for plan sponsors to think about any changes they might want for their plans, such as adding a Roth 401(k) provision, an automatic enrollment provision, in-service distribution provision at age 59 ½, etc. We would be happy to review plan design and discuss possible changes.
Department of Labor Fee Disclosure Project
Our next newsletter will discuss the Department of Labor’s three-prong fee disclosure project. The initiative includes:
- Proposed regulations that could be effective as early as January 1, 2009. Under the regulations, individuals in ERISA plans that provide for participant direction of investment would have to receive certain information before entering the plan and at least annually thereafter. That includes fees chargeable to a participant’s account; an explanation of participant investment rights and limitations; information on participant voting rights, if any; and a chart of investment alternatives, including name, web site, investment category, management type (active or passive), performance data, benchmarks and fees. At least quarterly, each participant would be provided with the dollar amount actually charged against accounts for services.
- Other proposed regulations would require plan service providers, including third party administrators, to provide written fee and other disclosures to plan fiduciaries before they enter into, renew or extend service agreements. Both direct and indirect compensation would require disclosure. The contract or arrangement must be in writing and outline any conflicts of interest.
- For large plans subject to audit, Form 5500 Schedule C fee reporting requirements will be expanded beginning with the 2009 plan year. New rules broaden the definition of “service provider” and call for the reporting of both direct and indirect compensation received by service providers.
For more information, contact:
Dolores Lawrence, CPA, QKA
Manager
RubinBrown Benefits Group
314.290.3224
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