The Uniformed Services
Employment and Reemployment Rights Act of 1994 ("USERRA") protects
the rights of employees who leave their employment to enter military
service. Among its protections are a number of rules governing
contributions to and the crediting of service under an employer’s
retirement plan.
The Department of Labor ("DOL") recently issued final
regulations, effective January 16, 2006, that clarify USERRA’s
employee benefit plan requirements and update the notice of USERRA
rights that employers are required to provide to their employees.
This newsletter focuses on the final USERRA rules affecting
retirement plans.
USERRA’s Scope
USERRA’s retirement plan protections apply to all employers
(regardless of size), including foreign employers doing business in
the U.S. and many foreign subsidiaries of U.S. companies.
Coverage Under USERRA
USERRA generally protects all employees (but not independent
contractors) who serve in any of the following roles:
- Members of the Army, Navy, Air Force, Marine Corps, and Coast
Guard;
- Members of the Reserves, Army and Air National Guards (when
called up under federal, rather than state, authority);
- Members of the National Disaster Medical System; and
- Members of the Commissioned Corps of the Public Health
Service.
To be eligible for USERRA protections, an employee must generally
give advance notice to his employer of the need to be absent for
military service. Notice may be given orally or in writing. Notice
is not required where notice is impossible or unreasonable to give
under the circumstances.
After an honorable discharge, an employee must generally apply
for reemployment, based on the following timetable, to receive
USERRA-provided reemployment benefits:
- Service less than 31 days: The first workday that is at least
eight hours after returning home.
- Service from 31-180 days: Within fourteen days after
completing service.
- Service in excess of 180 days: Within ninety days of
completing service.
If an employee is hospitalized or convalescing from an illness or
injury incurred or aggravated during military leave, he must submit
an application for reemployment to the employer at the end of the
period necessary for recovering from the illness or injury. This
period may not exceed two years from the date of the completion of
service (except in certain circumstances beyond an employee’s
control that make reporting within the period impossible or
unreasonable).
Retirement Plans Covered by USERRA
USERRA applies to retirement plans covered by the Employee
Retirement Income Security Act of 1974 ("ERISA") and non-ERISA plans
such as those sponsored by a state, government entity (other than
the Federal Thrift Savings Plan) or church.
Notice Requirements
Employers are required to post, mail or email notice to their
employees of their USERRA rights, benefits and obligations. A
revised version of the DOL’s model USERRA notice was published in
December 2005 and is required to be used on and after January 18,
2006.
Service Crediting After Reemployment
After an employee is reemployed after military service, he must
be treated as having not had a "break in service" under the
employer’s retirement plan. Rehired employees are treated as having
uninterrupted service with the employer during the entire period of
absence related to military service for purposes of determining
participation, vesting and accrual of benefits.
Defined Contribution Plans Without
Employee Contributions
When an employee is rehired by an employer maintaining a defined
contribution plan that does not require employee contributions, such
as a money purchase or profit sharing plan, the employer is required
to make the contributions that would have been made on the
employee’s behalf had he been employed by the employer during the
period of military service.
These contributions must be made by the later of:
- Ninety days after the date of reemployment, or
- When plan contributions are normally due for the year in which
the military service was performed.
If, however, it is impossible or unreasonable for an employer to
make these contributions within this time period, the employer must
make the contributions as soon as practicable. An employee is not
entitled to any allocation of forfeitures or earnings on missed
contributions that he would have received during his period of
military service.
Example: Prior to entering
military service on January 1, 2007, Harry participated in his
employer’s profit sharing plan which provides for an annual
contribution of 1% of his compensation. When Harry is reemployed on
October 1, 2009, his employer must make profit sharing contributions
of 1% of the compensation he would have received during the period
he was on military leave.
Contributions for the 2007 and 2008 plan years must be
contributed within 90 days of October 1, 2009. Contributions for the
2009 plan year must be made by the due date for regular 2009
contributions. Harry will not be credited with any investment return
on these make-up contributions for the period of his military
service.
Defined Contribution Plans With Employee
Contributions
When an employee is rehired by an employer maintaining a defined
contribution plan that permits employee contributions, such as
401(k) deferrals, the employee must be permitted to make up, in
whole or in part, the contributions that could have been made had he
been employed by the employer during the period of military service.
Also, the employer is obligated to match an employee’s make-up
contributions if the employee contributions missed during the
employee’s military service were eligible for employer matching
contributions.
If an employee wants to make up missed employee contributions,
the employee must make these contributions within the period that is
the lesser of:
- Three times the period of military service, or
- Five years from the date of reemployment.
An employee may only make these contributions while employed with
his post-service employer.
Once missed employee contributions have been made, an employer is
required to make up the matching contributions, if any, using the
same timetable that would normally apply to the contribution of
employer matching contributions.
An employee is not entitled to any allocation of forfeitures or
earnings on missed contributions that he would have received during
his period of military service and may not contribute the amount of
earnings he would have received during this period.
Example: Prior to entering
military service on January 1, 2007, Susan participated in her
employer’s 401(k) plan that provided that an employee’s deferrals
would be matched 50¢ for each $1.00 contributed on the first 6% of
compensation. When Susan is reemployed on January 1, 2009, her
employer must allow her to make up the deferrals she could have made
during her period of military service. She has five years from her
date of reemployment to make up the missed contributions.
When made, these deferrals must be matched by her employer at 50¢
for each $1.00 under the plan’s matching contribution formula.
Make-up matching contributions must be contributed to the plan on
the same timetable that applies to regular matching contributions.
Susan will not be credited with any investment return on these
contributions for the period of her military service.
Defined Benefit Plans
In a non-contributory defined benefit plan, upon reemployment
benefits will be the same as though the employee had remained
continuously employed during the period of military service. In a
contributory plan, the employee will need to make up contributions
in order to have the same benefit as if he had remained employed.
Calculation of Compensation
In determining the amount of contributions or accrued benefits,
an employer must use the rate of pay that an employee would have
received during a period of military service. If the rate of pay the
employee would have received is not reasonably certain (for example,
where an employee’s compensation is based on commissions), the
employee’s average rate of compensation in the twelve-month period
prior to entering military service is used as an employee’s
compensation.
Repayment of Prior Distributions
If an employee is a participant in a defined benefit plan, he
must be permitted to repay any distributions made in connection with
the military leave, including interest. Repayment must be made
within the same timeframe as employee make-up contributions to a
defined contribution plan or such longer time as may be agreed to
between the employer and the employee. Distributions from defined
contribution plans may not be repaid.
Interest Rate on Plan Loans Capped
Another military service related law, the Servicemembers Civil
Relief Act of 2003 ("SCRA"), caps the interest rate on retirement
plan loans. The types of military service covered by the SCRA are
similar, but not identical, to the types of service covered by
USERRA.
Under the SCRA, the maximum interest rate that a plan may charge
on plan loans outstanding at the start of active duty service is
equal to 6% from the date on which the employee is called to active
service. Any interest in excess of the 6% cap must be forgiven, not
simply postponed. However, a court may allow an interest rate higher
than 6% if the employee’s ability to pay is not materially affected
by his or her military service.
Suspension of Plan Loan Payments
Under the Internal Revenue Code, a plan may suspend loan payments
for participants in military service. Upon rehire, loan repayments
must recommence and be repaid in full (including interest that
accrued during the period of military service) by the end of the
period which equals the original term of the loan plus the period of
military service. The loan can either be reamortized to take into
account interest accrued during the suspension, or the participant
can make a balloon payment at the end of the extended loan repayment
period.
Conclusion
USERRA imposes significant requirements on retirement plan
sponsors and administrators. Plan sponsors who employ individuals
who enter or return from military service should carefully review
their plans to make sure they provide the benefits required by
USERRA and SCRA.
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