401(K) USERRA

Uniformed Services Employment and Reemployment Rights Act

When employees leave their job to perform military service, they have certain rights under their 401(k) plan both during their period of military service and after they return from military service under the Uniformed Services Employment and Reemployment Rights Act (USERRA) and the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act).

Service Credit

USERRA requires that an employee’s period of military duty be counted as service with the employer for purposes of eligibility, vesting, and the allocation of employer contributions under a 401(k) plan.  Returning service members are treated as if they had been continuously employed.   An employee cannot be treated as having incurred a break in service because of a period of military service.

Contributions

There is no requirement for an employer to make contributions to a 401(k) plan on behalf of a participant while the participant is on active military duty.  However, once the participant returns to work following military duty, special rules apply, depending on the types of contributions available under the 401(k) plan.

When an employee returns to work following military duty, the employee must be permitted to “make up” any “missed” 401(k) deferrals, Roth deferrals, or after-tax contributions that the participant could have made to the 401(k) plan had the participant not been on military leave.  The participant has a period equal to three times the period of military duty (not to exceed five years) to make up these “missed” contributions.  If the participant chooses to make up the “missed” contributions, the employer must make up any related matching contributions.

The participant must also receive make-up employer contributions for any other discretionary (non-matching) contributions that would have been made under the 401(k) Plan on behalf of the participant if the participant had been employed during the period of military duty.  The participant’s compensation for the period of the military service to be used in determining make-up employer contributions is generally based on the compensation the participant would have received during the leave.  If this is not reasonably certain, the participant’s average compensation received during the 12 months immediately before the period of military service may be used.

The employer is not required to include any earnings or forfeitures that would have been allocated to the employee had the contributions been made during the employee’s military service.

Differential Wage Payments

Although not required, an employer may choose to pay some or all of the compensation that an employee would have received from the employer during the individual’s period of active duty had the employee not been called to active duty.  If the employee receives these amounts while performing active military duty for a period of more than 30 days, they are considered “differential wage payments.”  The HEART Act requires that individuals who receive differential wage payments be considered employees of the employer making the payment.  This means that the differential wage payments are treated as wages for income tax withholding purposes.

For purposes of determining contributions under a 401(k) plan, differential wage payments may be, but are not required to be, treated as compensation.  However, differential wage payments are required to be treated as compensation for purposes of applying the maximum contribution limits of Code Section 415.

Qualified Reservist Distributions

The HEART Act allows, but does not require, a 401(k) plan to treat an individual who is called to active duty for more than 30 days as having been severed from employment during the period of active duty, so the person is eligible to elect to receive a distribution of their 401(k) deferrals.  This is called a qualified reservist distribution.  A qualified reservist distribution is considered to be an eligible rollover distribution, and it is subject to the 20% mandatory income tax withholding and notice requirement that applies to eligible rollover distributions.

Plan Loans

While a participant is away on military service, the interest rate on any plan loan owed by the participant must be dropped down to no more than 6%.  Under USERRA, a plan may, but is not required to, allow the participant to suspend loan payments to the plan during the period of active military service.  If loan payments are suspended, the participant must resume loan payments when the participant returns to work.  The participant must repay the remaining loan balance (including interest accrued during the period of military service), with the payment frequency and amount of the loan payments at least equal to the payment schedule that applied before the military service.  The full loan amount must be paid by the end of the maximum term for the original loan (typically 5 years) plus the military service period.

Survivor Rights

If a participant dies during qualified military service, the HEART Act requires that the plan provide the participant’s survivor with any additional benefits (other than accruals during the military service) that would have been provided under the 401(k) plan if the participant had resumed employment and then terminated employment on account of death (such as accelerated vesting and other survivor’s benefits that apply when a participant dies before terminating employment).

Disability Benefit Option

Although not required, a 401(k) plan may choose to treat an individual who becomes disabled while performing military service as if the individual had resumed employment and then terminated on the date of their disability, so the individual accrues employer contributions.  Unless the disabled employee is permitted to and chooses to make elective deferrals under the plan after becoming disabled, the employee will receive matching contributions based on deemed elective deferrals based on the average deferrals of the employee during the 12 months prior to military service.  The plan may, but is not required to, provide vesting service credit for a participant who becomes disabled while performing qualified military service.

Additional Resources

Click Here for the Department of Labor Web Site.

Heroes Earnings Assistance and Relief Tax (HEART) Act Guidance Notice 2010-15.