Employee Benefits-IRS Guidance On Heart Act Distributions To Military Personnel

As noted in my last blog, in Notice 2010-15, the IRS provides guidance on certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act ” or “Act”). One topic covered is distributions from 401(k), 403(b) and 457 plans.

The Notice indicates that section 414(u)(12)(B) of the Internal Revenue Code (the “Code”), as added by section 105 of the Act, treats any individual, who is on active military duty for more than 30 days, as having severed from employment for purposes of receiving a distribution from a 401(k), 403(b) or 457 plan. Thus, if the plan permits, a 401(k), 403(b) or 457 plan may make a distribution to this individual. However, if the plan does so, then the individual cannot make elective deferrals or employee contributions to any plan of the employer during the 6-month period beginning on the date of the distribution. The distribution is generally an eligible rollover distribution, and is thus eligible for rollover treatment.

The Notice points out that, under pre-Act section 72(t)(2)(G)(iii) of the Code, the 10% penalty for an early payment from a 401(k) plan or 403(b) plan does not apply to a “qualified reservist distribution”. A qualified reservist distribution is one which is:

–attributable to elective deferrals under a 401(k) or 403(b) plan; and

–made to a member of the reserves who has been ordered or called to active duty for more than 179 days or for an indefinite period.

A qualified reservist distribution can be made, without regard to otherwise applicable restrictions under section 401(k) and 403(b) on in-service distributions of amounts attributable to elective deferrals. Prior to the Act, the rules for qualified reservist distributions applied to individuals ordered or called to active duty after September 11, 2001, and before December 31, 2007. Section 107 of the Act amends section 72(t)(2)(G) of the Code to delete the reference to December 31, 2007, so that the special rules for qualified reservist distributions no longer have an expiration date.

As a technical matter, the Notice states that, if an individual is eligible under a 401(k) plan to receive a distribution as a result of a deemed severance from employment under section 414(u)(12)(B), and is also eligible under the plan to receive a qualified reservist distribution under section 72(t)(2)(G)(iii), then the distribution is treated as a qualified reservist distribution. This way, the distribution is not subject to the 6-month restriction on elective deferrals and employee contributions, or to the 10-percent early payment penalty under section 72(t). Presumably, the same rule would apply in the case of a distribution from a 403(b) plan.

The Notice indicates that a 401(k) plan must be amended by the final day of the first plan year starting on or after January 1, 2010 (2012 for government plans) to reflect the above rules, to the extent that the plan wishes to currently use them.