Effects of Military Service on a Retirement Plan

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By Cindy Fairchild, QKA

Can employees make up missed contributions to an employer-sponsored retirement plan for the time they were called to active military duty?

Yes. Eligible employees must be given the opportunity to contribute deferrals or after-tax contributions, including catch up, for the period of military service. The period for making the missed contributions is the lesser of

  • three times the length of the employee’s immediate past period of military service, or

  • five years from reemployment. 

If the plan provides for matching contributions, the employer must make any matching contributions related to the contributions made by the employee.

Can a plan sponsor adopt special distribution options for employees called to active military duty?

There are two distribution options available to the plan sponsor: deemed severance and qualified reservist distributions. 

Under “deemed severance,” any participant performing qualifying military service is considered to have a deemed severance of employment. Qualifying military service is defined as being called to active duty for more than 30 days. Deemed severance from employment is a distribution trigger—if allowed by the plan—so someone on military leave would be eligible to take a plan distribution, subject to the following rules.

  • Sources available for distribution are limited to deferrals, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs) and income attributable to these contribution types.

  • Deferrals must be suspended for six months following a deemed severance distribution.

  • The distribution is subject to the 10 percent early distribution penalty tax unless an exception applies.

A “qualified reservist distribution” provision allows plans to provide for a triggering event for qualified reservists who are ordered to active military duty in the Reserves or National Guard for a period exceeding 179 days or an indefinite period, permitting them to distribute their elective deferrals, subject to the following rules.

  • Sources available for distribution are limited to deferrals and income attributable to this contribution type.

  • Request is made during the period beginning on the date of the call to duty and ending at the close of the active-duty period.

Qualified reservist distributions are exempt from the 10 percent early distribution penalty tax, and the six-month suspension of deferrals following distribution does not apply. An individual may recontribute all or part of a qualified reservist distribution to an IRA at any time during the two-year period immediately following the end of the active-duty period.   

An individual who qualifies for both a qualified reservist distribution of deferrals and for a distribution based on deemed severance from employment will be treated as receiving a qualified reservist distribution. 

Are there special allowances for loan repayments for an employee called to active military duty?

A plan sponsor can amend its loan policy to allow for the suspension of loan repayments for a participant while on military duty leave of absence. Upon return to employment, an employee may do the following.

  1. Re-amortize the loan. The total amount due, including missed payments and accrued interest, is re-amortized over a period not longer than the remaining time frame allowed for the original loan plus the time the participant was on leave for military service. If the original loan was for less than the maximum period allowed—such as a four-year loan, rather than the allowable five—then that differential—one year, in this case—is added to the post-service repayment period.  The payment after the leave of absence cannot be less than the payment before the leave of absence. 

  2. Refinance the loan (plan permitting). As this is treated as a new loan, the loan qualification requirements, including the interest rate, must be re-evaluated. 

  3. Continue regular payments (if the original loan term has not expired) and make a balloon payment before the end of the loan payment period. The missed payments and accrued interest will be due in a balloon payment at the end of the loan term.