February 2010

Dear Partner Name,

On June 17, 2008, the Heroes Earnings Assistance and Relief Tax (HEART) Act (the Act) was signed into law. This Act provided tax and savings assistance to military veterans and their families. On January 20, 2010, the Internal Revenue Service (IRS) issued Notice 2010-15 that gives guidance on certain provisions included in the HEART Act.

Benefits to Survivors

The HEART Act requires plans to provide to employees who die during military service the same benefit that the plan
would provide to employees who die in active service with the employer. The guidance specifies that the benefits subject to this requirement include accelerated vesting, ancillary life insurance benefits, and any death benefit that is contingent on a participant’s termination of employment on account of death. The Act does not require plans to credit benefit accruals and contributions for the period of military service in determining a death benefit. However, a deceased participant’s military service must be counted for vesting purposes.

Differential Pay

The HEART Act requires that differential pay be treated as wages for income tax reporting purposes and must be reported on Form W2. The guidance clarifies that differential pay is not required to be counted as compensation for purposes of determining contributions and benefits. However, differential pay must be treated as compensation for determining IRS Code Section 415 limits. If the plan includes differential pay to determine contributions and benefits, the differential pay and the contributions and benefits derived from the pay may (not required) be used in any nondiscrimination test as long as it doesn’t cause the plan to fail the test. Excluding differential pay from compensation used to determine contributions and benefits will not cause a plan to fail to meet the nondiscrimination requirements for compensation that is in IRS Code Section 414(s).

Distribution of Elective Deferral Contributions a/c Deemed Separation from Service

The HEART Act allows employees who serve a period of military service of more than 30 days to be treated as having a severance from employment and therefore can request a distribution of elective deferral contributions, amounts attributable to a salary reduction agreement from a 403(b) plan, and amounts deferred under a 457(b) plan. Participants taking the distribution cannot make elective deferral contributions for six months and are subject to the 10% early withdrawal tax. The guidance clarifies that
this distribution is an eligible rollover distribution and is subject to 20% mandatory withholding.

Qualified Reservist Distribution

The Pension Protection Act (PPA) introduced a new withdrawal option available to 401(k) and 403(b) plans called the qualified reservist distribution. This optional plan provision permits penalty-free withdrawals from elective deferral accounts for participants called to active duty on and after September 11, 2001 for a period of at least 180 days.

The guidance explains the coordination between the qualified reservist distribution and the distribution on account of deemed separation from service. If a participant is eligible to receive both a qualified reservist distribution and a distribution on account of deemed separation from service, the distribution will be treated as a qualified reservist distribution. As a result, the distribution would not be subject to the six-month restriction on elective deferral contributions or to the 10% early withdrawal tax.

Plan Amendments

Plan amendments that reflect the HEART Act must be signed by the last day of the 2010 plan year (2012 for governmental plans). Plans must operate according to the Act prior to the date a plan amendment is signed.