Expanding Military Benefits through the Heroes Earnings Assistance and Relief Tax Act and. the Family and Medical Leave Act:

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1 Expanding Military Benefits through the Heroes Earnings Assistance and Relief Tax Act and the Family and Medical Leave Act: Additional Uniformed Services Employment and Reemployment Rights Act related benefits Found Outside of Title 38 On June 17, 2008, Congress passed the Heroes Earnings Assistance and Relief Tax of 2008 ( HEART Act ). The general purpose of this bill is to provide benefits for military personal. 1 While the benefits found in the HEART Act are located in the Internal Revenue Code, 2 the eligibility requirements under the Uniformed Services Employment and Reemployment Rights Act s (USERRA) reemployment rights provision are used to determine eligibility for many of the benefits found in the HEART Act 3. This means many of the issues in USERRA compliance are now grafted onto the Internal Revenue Code. USERRA and the provisions of the HEART Act that utilize the framework found in USERRA are among some of the most significant labor legislation since the 1930s. This paper focuses mostly on the death and disability benefit provisions included in the HEART Act, but the HEART Act added much more to the Internal Revenue Code than those related to USERRA 4. The HEART Act affects death and disability benefits through changes in the requirements and options for certain types of retirements plans. This paper will also discuss additional benefits that were added to the Family and Medical Leave Act ( FMLA ) that effect service men and women. I. Overview of USERRA Related Benefits Provided by the HEART Act 1 Heroes Earnings Assistance and Relief Tax Act of 2008, Pub. L. No , 122 Stat [hereinafter HEART Act] 2 See Id U.S.C 401(a)(37), 414(u)(5). 4 See Generally HEART act.

2 a. Mandatory Provisions 1. Qualified Trusts 26 U.S.C. 401 governs what is and isn t a qualified trust for stock bonus, pension, or profit-sharing plan[s]. 5 The Heart Act amended this section by adding paragraph 37 to subsection a. 6 This amendment reads as follows: A trust shall not constitute a qualified trust unless the plan provides that, in the case of a participant who dies while performing qualified military service (as defined in section 414(u)), the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan had the participant resumed and then terminated employment on account of death. 7 This provision essentially mandates that any trust under this section must provide its death benefit to the survivors of those who die during qualified military service as if the service member was a current employee at the time of death. 2. Annuity Contracts 26 U.S.C. 403(b) governs the taxability of annuity contracts purchased by certain tax exempt organizations 8 The HEART Act amended this section by adding paragraph 14 to subsection (b). 9 The amended section reads as follows: This subsection [referring to subsection b] shall not apply to an annuity contract unless such contract meets the requirements of section 401(a)(37). 10 The requirements of section 401(a)(37) are laid out above. It appears to be the intention of the statute to require an annuity contract to pay any death benefit to the survivors of an individual who dies during qualified military service; 5 26 U.S.C. 401(a). 6 The Heart Act 104(a) U.S.C. 401(a)(37) U.S.C. 403(b). 9 The HEART Act 104(c)(2) U.S.C. 403(b)(14).

3 however, this result must be inferred because the statute does not ask the reader to replace the term qualified trust with annuity contract for the purposes of cross-referencing 26 U.S.C. 401(a)(37) with 26 U.S.C. 403(b)(14). 11 A similar result occurs with regard to annuity contract purchased by other employers. In order to receive the tax benefits of 26 U.S.C. 403(a), a plan must meet the requirements of 26 U.S.C. 404(a)(2). 12 The HEART Act amended 26 U.S.C. 404(a)(2) to require compliance with 26 U.S.C. 401(a)(37), 13 which results in these annuity contracts being covered by the HEART Act. 3. Deferred Compensation Plans 26 U.S.C. 457 governs deferred compensation plans of governmental organizations and tax exempt organizations. 14 The relevant HEART Act amendment to this section is found in paragraph 4 of subsection g: A plan described in paragraph (1) shall not be treated as an eligible deferred compensation plan unless such plan meets the requirements of section 401(a)(37). 15 Again, while the statute does not instruct the reader to replace qualified trust with eligible deferred compensation plan in order to read section 401(a)(37) in a manner relevant to deferred compensation plans, 16 the intention seems to be that a deferred compensation plan must pay any death benefits to the survivors of anyone killed while performing qualified military service as if that individual died while employed. It should be noted that the HEART Act s benefits seem to apply only to the deferred compensation plans of some organizations but not others. 26 U.S.C. 457(g)(4) only refers to 11 See Id U.S.C. 403(a)(1). 13 The HEART Act 104(c)(1); 26 U.S.C. 404(a)(2). 14 See 26 U.S.C. 457(a). 15 HEART act 104(c)(3); 26 U.S.C. 457(g)(4) U.S.C. 457(g)(4)

4 plans mentioned in 26 U.S.C. 457(g)(1), which in turn only applies to plans of employers described in subsection (e)(1)(a) U.S.C. 457(e)(1)(A) refers to employers that are a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State U.S.C. 457(e)(1)(B), on the other hand, refers to any organization (other than a governmental unit) exempt from tax under this subtitle. 19 Since the deferred compensation plans of non-governmental, tax-exempt organizations are not covered by 26 U.S.C. 457(g)(1) and hence not implicated in 26 U.S.C. 457(g)(4), it appears that the HEART Act has left the deferred compensation plans of such organizations unaffected. 4. Results of Failure to Follow the HEART act s Requirements The down sides for failure to comply with the HEART act death benefits are dire. A plan that does not create a qualified trust under 26 U.S.C. 401(a) because it fails to satisfy 26 U.S.C. 401(a)(37) will not be exempt from taxation under 26 U.S.C. 501(a). 20 The HEART Act creates a similar result with regard to annuity contracts and government agency (state level or lower per 26 U.S.C. 457(e)(1)(B)) sponsored deferred compensation plans. An annuity contract that fails the requirements of 26 U.S.C. 403(b)(14) loses the protection of 26 U.S.C. 403(b), which generally provides that contributions and other additions for a conforming contract shall be excluded from the gross income of the employee for the taxable year An annuity contract that fails to satisfy 404(a)(2) will not be protected by 403(a)(1). 22 A U.S.C. 457(g)(1), (4) U.S.C. 457(e)(1)(A) U.S.C. 457(e)(1)(B). 20 See 26 U.S.C. 401(a)(37), 501(a) U.S.C. 403(b) U.S.C. 403(a)(1), 404(a)(2).

5 deferred compensation plan that fails 26 U.S.C. 457(g)(4) will not be eligible for deferral of taxation on that income otherwise available under 26 U.S.C. 457(a)(1). 23 b. Optional USERRA Related Provisions of the HEART Act The HEART act also amended the Internal Revenue Code to include an optional provision to consider in the creation of retirement plans. 24 The relevant language is as follows: (9) Treatment in the case of death or disability resulting from active military service. (A) In General. For benefit accrual purposes, an employer sponsoring a retirement plan may treat an individual who dies or becomes disabled (as defined under the terms of the plan) while performing qualified military service with respect to the employer maintaining the plan as if the individual has resumed employment in accordance with the individual s reemployment rights under chapter 43 of title 38, United States Code, on the day preceding death or disability (as the case may be) and terminated employment on the actual date of death or disability. In the case of any such treatment, and subject to subparagraphs (B) and (C), any full or partial compliance by such plan with respect to the benefit accrual requirement s of paragraph (8) with respect to such individual shall be treated for purposes of paragraph (1) as if such compliance were required under such chapter Use of this optional provision to deem the dead or disabled individual as having exercised reemployment rights under USERRA would then seem to trigger the requirements of 26 U.S.C. 414(u)(8), which would require the time served in the military to be counted towards the calculation of death and disability benefits under the plan. 26 c. Retroactive Application U.S.C. 457(a)(1), (g)(1), (g)(4). 24 HEART Act 104(b) U.S.C. 414(u)(9). 26 See 26 U.S.C. 414(u)(8).

6 Both the mandatory and discretionary provisions discussed above are made retroactive by section 104(d) of the HEART act. 27 The section causing retroactive application of these provisions was included in the notes to 26 U.S.C. sec. 401 as follows: (d) EFFECTIVE DATE.-- (1) IN GENERAL. The amendments made by this section [amending this section and 26 U.S.C. sec. sec. 403, 404, 414, and 457] shall apply with respect to deaths and disabilities occurring on or after January 1, (2) PROVISIONS RELATING TO PLAN AMENDMENTS. (A) (B) IN GENERAL. If this subparagraph applies to any plan or contract amendment, such plan or contract shall be treated as being operated in accordance with the terms of the plan during the period described in subparagraph (B)(iii). AMENDMENTS TO WHICH SUBPARAGRAPH (A) APPLIES. (i) IN GENERAL. Subparagraph (A) shall apply to any amendment to any plan or annuity contract which is made (I) (II) Pursuant to the amendments made by subsection (a) or pursuant to any regulation issued by the Secretary of the Treasury under subsection (a), and on or before the last day of the first plan year beginning on or after January 1, In the case of a governmental plan (as defined in section 414(d) of the Internal Revenue Code of 1986), this clause shall be applied by substituting 2012 for 2010 in sub clause (II). (ii) CONDITIONS. This paragraph shall not apply to any amendment unless (I) (II) The plan or contract is operated as if such plan or contract amendment were in effect for the period described in clause (iii), and Such plan or contract amendment applies retroactively for such period. 27 HEART Act 104(d).

7 (iii) PERIOD DESCRIBED. The period described in this clause is the period (I) (II) beginning on the effective date specified by the plan, and ending on the date described in clause (i)(ii) (or, if earlier, the date the plan or contract amendment is adopted). 28 This subsection contains two retroactive provisions: section 104(d)(1) causes the amendments to apply to all deaths on or after January 1, 2007, and section 104(d)(2) allows certain plans to be retroactively amended. 29 While the retroactivity described in section 104 (d)(1) of the HEART clearly applies to all provisions discussed above, 30 it is unclear which types of plans may be retroactively amended. Section 104 (d)(2)(b)(i)(l) makes the ability to amend any plan or annuity contract contingent on the amendment being made [p]ursuant to the amendments made by subsection (a). 31 The subsection (a) referred to is section 104(a) of the HEART act, which added paragraph (37) to 26 U.S.C. 401(a) U.S.C. 401(a)(37), by its language, applies only to qualified trust determinations. 33 However, the provisions mandating death benefits in annuity contacts and deferred compensation plans all utilize 26 U.S.C. 401(a)(37) 34, and 104(d)(2)(B) mentions plans and annuity contract 35. This leads to the conclusion that the retroactive plan amendment rights are meant to apply all of the mandatory death benefits discussed above U.S.C. 401 note (Effective and Applicability Provisions). 29 HEART Act 104(d)(1), (2). 30 Id. at 104(d)(1). 31 Id. at 104(d)(2)(B)(i)(I). 32 Id. at 104(a). 33 See 26 U.S.C. 401(a)(37) U.S.C. 403(b)(14), 404(a)(2), 457(g)(4). 35 HEART Act 104(d)(2)(B).

8 The IRS has issued some guidance on the issue of retroactive plan amendments. While not resolving the issue of which type of plans may be retroactively amended, the excerpt from the following notice gives a plain English description of how the mechanism works: Under section[] 104(d)(2)... of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART act), Pub. L , a plan amendment made pursuant to section[] 104(a)... of the HEART Act generally may be retroactively effective, if, in addition to meeting the other applicable requirements, the amendment is made on or before the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012 in the case of a governmental plan). 36 d. Drafting advice Unfortunately, there seems to be no official advice or case law to guide practitioners in drafting plans and contracts that comply with these provisions of the HEART Act. e. Potential for Conflict The most obvious situation where issues related to the HEART Act may arise is in litigation with the IRS regarding a plan or contract s compliance with the act s provisions. Another area of litigation can arise even if the plan does comply with the HEART act. Even with a compliant plan in place, there may still be controversies over whether a particular individual is eligible for reemployment benefits under USERRA so as to satisfy the definition of Qualified Military Service. The general requirements for USERRA reemployment rights are discussed below and in other papers from members of this panel. II. Getting in the Door: The Reemployment Requirements under USERRA. 36 Notice , I.R.B (2008).

9 a. Applicability to the HEART Act. The USERRA related benefits found in the HEART Act all relate to Qualified Military Service. 37 The term Qualified Military Service is defined as any service in the uniformed services (as defined in chapter 43 of title 38, United States Code) by any individual if such individual is entitled to reemployment rights under such chapter with respect to such service. 38 USERRA reemployments rights are then a prerequisite to HEART Act benefits. b. General Requirements for Reemployment Eligibility for reemployment rights is generally determined as follows: (a) Subject to subsections (b), (c), and (d) and to section 4304, any person whose absence from a position of employment is necessitated by reason of service in the uniformed services shall be entitled to the reemployment rights and benefits and other employment benefits of this chapter if (1) The person (or an appropriate officer of the uniformed service in which such service is performed) has given advance written or verbal notice of such service to such person s employer; (2) The cumulative length of the absence and of all previous absences from a position of employment with that employer by reason of service in the uniformed services does not exceed five years; and (3) Except as provided in subsection (f), the person reports to, or submits an application for reemployment to, such employer is accordance with the provisions of subsection (e). 39 Since it requires that an individual must be entitled to reemployment rights, the implication of the definition of Qualified Military Service is that all of the requirements of 38 U.S.C. 4312(a) must be satisfied in order for HEART act benefits to apply U.S.C. 401(a)37, 403(b)(14), 404(a)(2), 414(u)(9)(A), 457(g)(4) U.S.C. 414(u)(5) U.S.C. 4312(a).

10 1. The Five Year Limitation The five year limitation mentioned in 38 U.S.C. 4312(a)(2) is subject to several statutory and regulatory exemptions that prevent certain periods of service from counting towards the overall five-year limitation. The statutory exceptions are listed in 38 U.S.C (c). 40 The Department of Labor regulations that relate to this provision restate the statutory exemptions in an easier to read format with explanations as to the types of service covered. The regulations also add another exception not found in the statutes: Service performed to mitigate economic harm where the employee s employer is in violation of its employment or reemployment obligations to him or her is not counted toward the five-year limitation. 41 It appears that courts will not consider whether these exemptions are applicable unless the individual has satisfied the other requirements of 38 U.S.C. 4312(a) (i.e. the requirements of prior notice and reapplication) Notice and Reapplication Requirements There has been much litigation over the notice and reapplication requirements for USERRA reemployment rights. The recent developments in the case law in these areas are covered in the other papers included by members of this panel. 3. New Military Benefits in the FMLA The FMLA was amended by section 585 of the National Defense Authorization Act for Fiscal Year U.S.C. 2612(a)(1)(E) was added, which entitles an employee to U.S.C. 4312(c) C.F.R See Erickson v. United States Postal Service, 571 F.3d 1364, 1370 (Fed. Cir. 2009) (court did not consider whether certain periods of service were exempted from the five year count because petitioner failed to apply for reemployment within the statutory timeframe). 43 National Defense Authorization Act for Fiscal Year 2008, Pub. L. No , 585, 122 Stat. 3 (2008).

11 workweeks of leave during any 12- month period... [b]ecause any qualifying exigency (as the Secretary shall, by regulation, determine) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on active duty (or has been notified of an impending call or order to active duty) in the Armed Forces in support of a contingency operation. 44 Further, the new amendments provide enhanced leave to care for injured service men and women. New 26 U.S.C. 2612(a)(3) provides as follows: Subject to section 2613 of this title, an eligible employee who is the spouse, son, daughter, parent, or next of kin of a covered servicemember shall be entitled to a total of 26 workweeks of leave during a 12-month period to care for the servicemember. The leave described in this paragraph shall only be available during a single 12- month period. 45 The relevant regulations define the relationships covered, 46 what types of care is covered, 47 and what a qualifying exigency is 48. The regulations also point out that time served in the military counts toward qualifying an employee for this leave because of the effect of USERRA. 49 Conclusion The amendments found in both the HEART Act and the National Defense Authorization Act of Fiscal Year for 2008 provide important new benefits for servicemembers. These changes are so recent that there is not a great deal definitively settled about their impact. While much what has been decide with regard to eligibility for USERRA reemployment rights, the five year limitation may begin to play an increased role in determinations if deployments are lengthened U.S.C. 2612(a)(1)(E) U.S.C. 2612(a)(3) C.F.R C.F.R , C.F.R C.F.R