USERRA, HEART Act, Make-Up Contributions, Military Differential

[Guest BWNWE]

Can anybody offer links to DOL/IRS guidance regarding the following scenario for a participant in a 401(k) Plan who returns from military leave?

The hypothetical cirumstances:

1. EE worked through March and had $10,000 in 401(k) eligible earnings up to leave (annual salary of $40,000)

2. EE was paid $3,000 in Military Differential Pay, which is considered 401(k) eligible earnings

3. EE defers 4% and therefore has total elective deferrals of $520 ($10,000 + $3,000 = $13,000 x 4%=$520)

4. Company match on 100% up to 4% of eligible earnings, total company match based on eligible earnings = $520

5. EE returns at end of payroll year (total leave of 8 months, total period eligible for make-up is 24 months)

Plan provision on deferrals

1. Elective deferrals: EE may defer up to the lesser of

a. 100% of eligible earnings; or

b. The 402(g) limit (unless eligible for EGTRAA catch-up contributions)

With all of the aforementioned stated, my question is:

1. In determining the missed contributions, would military differntial pay be considered? I.E. would the employee be considered to have missed $30,000 in earnings or would the person be considered to have missed $27,000 since the person received $3k in military differential pay?

a. From the standpoint of EE contributions, is the eligible make-up: $16,480 ($17,000-$520) or $16,600 ($17,000 - $400)

b. From the ER standpoint, is the company responsible to match, assuming the total the EE elects is at least 4% of the missed earnings: $1,200 ($30k x 4%)

or $1,080 ($27k x 4%)?

Finally, is it permissible or, in fact, required that the ER inquire about elective deferrals that the EE made to any type of plan maintained by the military in order to offset the amount the EE defers and the ER matches?

[sdix401k]

I am looking at the same situation. I referenced the ERISA Outline Books. This is what I came up with:

I believe differential pay should be excluded. This would be considered normal plan compensation. To determine make up compensation it would be the amount that would have been earned based at the time of deployment.

The amount that can be made up is the difference between anything deferred in that year of leave minus the 402(g) limit in effect that year.

Employer would be required to make up missed matching based on make up compensation. Both deferrals and match are disregarded in ADP/ACP tests.

Employer must match if employee deferred. Contributions for employer are deducted in year deferred. Employee's W2 is coded in box 12 with the amount that was deferred under USERRA and some other designation.

My question would be how long does the employee have to make up contributions from a prior year. I did not see anything on this.

[00hskrgrl]

We handle a lot of MLOA's. Agree with sdix401k that the differential pay would be excluded, but keep in mind that under USERRA the employer must also have to credit the employee with any pay increases they would have received had they not been on leave. If the plan's definition of compensation includes variable items like bonuses and overtime, you may have to add in a 2-year average of those items to the employee's regular pay (including any merit, seniority, etc., increases that would have occured while s/he was on military leave).

So while excluding the $3,000 differential might bring you to $27,000, if the employee would have received a pay increase during the 8 months s/he was out and/or the plan compensation includes overtime/bonuses, you'll likely end up with an imputed salary of more than $27,000.

If the individual is on leave now in 2012 and will be coming back in 2013, then I agree that the total amount of deferral that could be made up would be $16,480 (plus catch-up, if applicable). If the leave occurred in 2011, then the maximum amount of make-up deferral would be $15,980 ($16,500 - $520).

Keep in mind that the USERRA rules only apply if the service member was discharged for any reason other than dishonorable discharge and returned to work within the specified period of time. You can confirm the type of discharge and discharge date by requesting a copy of the service member's DD214 or Certificate of Release. For a military leave in excess of 180 days, the employee has 90 days from discharge date to return to work.

Also keep in mind that the employee has up to 3 times the length of leave (not to exceed 5 years) to make-up contributions. In a case where the leave occurred during the last 8 months of 2011, the employee would have until the end of 2013 to make-up contributions.

The make-up contributions (and match) should be posted in your recordkeeping software to the year for which they are make-up (e.g., 2011 contribution for a 2011 leave, even if the make-up is paid in 2012 or 2013). Make-up contributions for prior years are not counted in any prior year's nondiscrimination testing (i.e. you don't have to redo to the testing for the year of leave nor can you count the contributions in the current year's testing, unless the make-up is made in the same plan year as the leave.)

Lastly, you cannot offset the make-up contributions by any benefits the employee received through the military.

Here's a few great web sites with more info:

http://www.military.com/benefits/military-...-questions.html

http://www.irs.gov/retirement/article/0,,id=109878,00.html

http://www.dol.gov/ebsa/faqs/faq_911_2.html