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Guest Article

(From the June 2, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Heroes Earnings Assistance Act Awaiting Signature By President

Passed unanimously by the House and Senate, The Heroes Earnings Assistance and Relief Tax Act of 2008 (H.R. 6081) now awaits signature by the President. Sponsored by Rep. Charles B. Rangel (DN.Y.), the Act provides a panoply of adjustments aimed at providing financial relief to military families.

With regard to employee benefits, The Heroes Earnings Assistance and Relief Tax Act (HEART) will make the following changes:

New “Death Benefit” Qualification Requirement: HEART adds new IRC § 401(a)(37) to require participants who die while performing “qualified military service” to be treated as if they had resumed employment on the day before death for purposes of determining eligibility for survivor benefits. Permanent Excise Tax Exception for Reservist Distributions: IRC § 72(t)(2)(G) is amended to eliminate the December 31, 2007 sunset date and make permanent the exception to the 10 percent early distribution tax for qualified reservist distributions. Rollover of Military Death Gratuities and Group Life Insurance Payments: IRC §§ 408A and 530 are amended to permit tax-free rollover of military death gratuities and group life insurance payments to the survivor’s Roth IRA or Coverdell Education Savings Account. “Qualified Reservist Distributions” Permitted from Health Care Flexible Spending Accounts: IRC § 125 is amended to allow cafeteria plans to permit tax-free distributions of unused benefits in the health care flexible spending account of a reservist called to active duty.

Among numerous other “military relief” provisions, HEART also:

Treats differential wage payments to an employee as a payment of wages for income tax purposes, and as compensation for retirement plan purposes. It defines "differential wage payment" as any employer payment to an individual serving on active duty in the uniformed services for more than 30 days that represents wages that would have been received if the individual were performing services for the employer. Allows certain small business employers a tax credit for up to 20 percent of the differential wage payments made for the benefit of active duty members of the Armed Forces. Allows an exclusion from gross income for bonus payments made by a state or political subdivision to current or former members of the uniformed services (or dependents) for service in a combat zone. Makes permanent the exclusion from the gross income of certain employees of the intelligence community of gain from the sale of their principal residences without regard to otherwise applicable five-year residential use and holding requirements. Exempts certain state and local payments to and benefits for volunteer firefighters and emergency medical responders from federal employment and unemployment taxes. Amends the Supplemental Security Income (SSI) provisions of the Social Security Act to treat cash remuneration paid to a member of the uniformed services as earned income and certain housing payments to such members as in-kind support and maintenance for SSI program purposes.

Notably, HEART also: (1) sets forth additional rules for the tax treatment of high-income individuals who relinquish U.S. citizenship or residency to avoid U.S. taxation, (2) treats certain foreign subsidiaries of U.S. companies performing services under a contract with the U.S. government as U.S. employers for purposes of Social Security and Medicare employment taxes, and (3) extends through 2008 the parity requirements applicable to mental health benefits offered by group health plans.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.

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