In the case of employees who are called to active duty, some employers have paid some or all of the compensation that a service member would have received from the employer during the service member’s period of active duty had the employee not been called to active duty. Prior to the enactment of the HEART Act, these payments, commonly referred to as “differential wage payments,” were not treated as wages for Federal employment tax purposes, pursuant to Rev. Rul. 69-136, 1969-1 C.B. 252.
Section 105(a) of the HEART Act amends § 3401 of the Code to treat differential wage payments as wages for income tax withholding purposes. The term “differential wage payment” is defined in § 3401(h) as any payment which (1) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days, and (2) represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer. This amendment applies to remuneration paid after December 31, 2008. See Rev. Rul. 2009-11, 2009-18 I.R.B. 896, for guidance relating to § 3401(h).
Section 105(b)(1)(A) of the Act adds § 414(u)(12)(A) to the Code, which provides that, for purposes of applying the Code to retirement plans subject to § 414(u), (1) an individual receiving a differential wage payment is treated as an employee of the employer making the payment, (2) the differential wage payment is treated as compensation, and (3) the plan is not treated as failing to meet the requirements of any provisions described in § 414(u)(1)(C) by reason of any contribution or benefit which is based on the differential wage payment. The provisions described in § 414(u)(1)(C) include various nondiscrimination requirements, including requirements under §§ 401(a)(4), 401(k)(3), and 401(m).
Section 105(b)(1)(A) of the Act also adds § 414(u)(12)(B) to the Code, under which, notwithstanding the treatment of an individual receiving differential wage payments as an employee, an individual is treated for purposes of distributions (including distributions from a designated Roth account under § 402A) under §§ 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 403(b)(11)(A), and 457(d)(1)(A)(ii) as having been severed from employment during any period the individual is performing service in the uniformed services described in § 3401(h). Section 414(u)(12)(B)(ii) provides that, if an individual elects to receive a distribution under this provision, the plan must provide that the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution. For purposes of the 6-month restriction, the definition of “elective deferral” under § 414(u)(2)(C) applies, which includes any deferral of compensation under an eligible deferred compensation plan under § 457(b).
