Posted by KLSM CPA Firm PLLC

What Is The Heroes Act?

What Is The Heroes Act?

The HEART (Heroes Earnings Assistance and Relief Tax Act 2008) Acts provides tax and retirement benefits for service members who are disabled while on active service for more than 30 days and their survivors if they die while in service.

The HEART Act compels employers and sponsors of defined benefit and defined contribution plans, such as the 403(b) and Section 457(b) education plans, to treat service members as re-employed for the purpose of entitlement by the sponsoring business. The goal is to provide the military and survivors with benefits they might not have been entitled to.

The benefits of the HEART acts depend on the specific benefits of the employer's plan documents and may include:

  • Accelerated purchase of retirement plans

  • Additional life insurance benefits

  • Survivorship benefits, such as death gratuity investments and servicemembers group life insurance (SGLI) payments into Roth IRA and Coverdell savings accounts, with no common limitations.


Eligibility

All service members and their survivors are eligible for the HEART Acts.

Benefits of the HEARTS Acts

Pension benefits

The HEART Act added provisions to USERRA (Uniformed Services Employment and Reemployment Rights Act) requiring that qualified pension plans provide that in cases where participants cannot return to their previous employment due to death or disability while on active duty, they or their survivors are entitled to any death or disability available to current employees. These additional benefits are:

  • Accelerated vesting in the pension scheme (but without accumulating additional benefits attributed to the period of military service)

  • Additional life insurance benefits

  • Other survivor benefits depending on the employer's benefits

Employers can (but are not required to) treat a person who dies or becomes disabled during skilled military service as if they had returned to work the day before death or the disability. Employers must treat all persons providing qualified military service under equivalent reasonable conditions.

Any amount of accrued benefits should be determined based on the actual average employee contributions or optional deferrals to the lesser of the following:

  • 12 months of employer service immediately before qualified military service or

  • The actual duration of continuous service with an employer

These additional benefits are applicable in the event of death and disability occurring after January 1, 2007.


Differential wage payments

Some employers choose to pay all or most of the compensation an employee would have received from the employer during the employee's active service period had he/she not been called up to active service. When paid to employees who have been on active service for more than 30 days, these payments are called "wage differential payments" and were not previously treated as wages for federal income tax purposes. Instead, they were treated on IRS Form 1099-MISC as self-employment income, for which the member had to pay taxes on their account. The HEART Act now requires that these payments be treated as wages to withhold income tax after December 31, 2008, as income on the IRS W2 form.

The purpose of this filing is to make payments to the employer's qualifying pension plan while the member is active.


Retirement plans for qualified reservist distributions

The HEART Act extends the Pensions Protection Act 2006 (members of the PPA service). These provisions allow military personnel called up for military service for periods of 180 days or more to take withdrawals from qualified pension plans and flexible health bills as if they had terminated their employment.

These withdrawals are no longer subjected to the 10% penalty that would apply. Retired military personnel cannot make new contributions to the plan for at least six months after withdrawal. At any time during the 2-years following the termination of the active service member's service, the service member may again contribute, in whole or in part, to an IRA (but not to the retirement scheme from which the distribution was taken).


Benefits for survivors

For 2021, total contributions to all Traditional and Roth IRAs cannot exceed:

  • $ 6,000 ($ 7,000 if you are over 50) or

  • Your taxable remuneration for the year if your remuneration was below this limit.

For 2019, and 2020 the limits were the same as for 2021.

For 2015, 2016, 2017, and 2018, your total annual contributions to all Roths and traditional IRAs cannot exceed:

  • $ 5,500 ($ 6,500 if you are over 50) or

  • Your taxable remuneration for the year if your remuneration was less than this dollar limit

Funds accumulated in eligible employer-sponsored pension plans can be "accrued" upon employment termination in the Traditional IRA or Roth IRA without Limit. Withdrawals from traditional IRAs and employer-sponsored qualified retirement plans are subject to income tax in the year in which they are made. Both are subject to a 10% early withdrawal penalty if funds are withdrawn before 59½. Both are subject to required minimum distributions after the year in which the participant reaches age 70.5. 

Beneficiaries of IRA accounts and qualifying retirement plans (excluding surviving spouses) must pay taxes on the amount inherited. Roth IRA distributions are exempt from required minimum distributions and taxation. Withdrawals up to the amount invested (capital) can be withdrawn free of charge at any time. The Roth IRA gains can be withdrawn tax-free after a five-year "seasoning" period. Roth IRA beneficiaries are not required to pay taxes on the inherited amount.

The HEART Act allows surviving spouses who receive death gratuities and SGLI death benefits to invest some or all of their funds in a Roth IRA, allowing the funds to grow tax-free, even when they are withdrawn or transferred to their beneficiaries. Withdrawals are permitted, without taxes or penalties, at any time up to the value of the initial investment.

The HEART Act also allows surviving spouses to deposit death gratuity and SGLI payments into Coverdell Education Savings Accounts (ESA). Coverdell's ESA distributions are generally tax-free, as these funds are used for the beneficiary's eligible educational expenses. Distributions that are not used for qualifying education expenses are subject to penalties and taxes similar to those for qualifying pension plans.


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