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The House has passed a package of military tax breaks for active and retired military service members with a host of provisions affecting qualified plans and IRAs. The Heroes Earnings Assistance and Relief Tax Bill of 2007 (H.R. 3997) was passed on a vote of 410 to 0. As we go to press, the Senate was expected to take up the measure.
The bill would make permanent the rules allowing active duty reservists to make penalty-free withdrawals from retirement plans and IRAs. Currently, the rules allowing penalty-free withdrawals for active duty reservists apply to individuals ordered or called to active duty after September 11, 2001, and before December 31, 2007.
The measure would add a new requirement for plans qualified under Code Sec. 401(a) . Under the bill, a qualified plan would have to provide that, in the case of a participant who dies while performing qualified military service, the survivors of the participant must be entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) that would have been provided under the plan had the participant resumed employment with the employer maintaining the plan and then terminated employment on account of death. Thus, if a plan provides for accelerated vesting, ancillary life insurance benefits, or other survivor benefits that are contingent upon a participant’s termination of employment on account of death, the plan would have to provide such benefits to the beneficiary of a participant who dies during qualified military service. These requirements would also apply to 403(b) plans and 457(b) plans maintained by state and local governments.
For benefit accrual purposes, the bill would permit a retirement plan to treat an individual who leaves service with the plan’s sponsoring employer for qualified military service, and who cannot be reemployed on account of death or disability, as if the individual had been rehired as of the day before death or disability (a “deemed rehired employee”) and then had terminated employment on the date of death or disability. In the case of a deemed rehired employee, the plan is permitted to comply fully or partially with the benefit accrual restoration requirements that would have applied under Code Sec. 414(u) had the individual actually been rehired.
The bill would permit an individual who receives a military death gratuity or Service members’ Group Life Insurance (SGLI) payment to roll over the amount to a Roth IRA or Coverdell education savings account, notwithstanding the contribution limits that would otherwise apply. The rollover could not be made later than one year after the date on which the gratuity or SGLI payment is received by the individual.
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