IRS Penalty Waivers for Certain Form 8955-SSA Delinquencies

On October 1, 2014, the IRS announced that due to changes to the DOL’s electronic filing system, filings under DFVC no longer include all information required by the IRS. The Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, which replaced the Schedule SSA (Form 5500), must be filed directly with the IRS (see Question 65 for details).

The IRS has therefore modified the requirements for qualifying for IRS penalty relief. The IRS is now waiving its late filing penalties only for filers who:

1.    satisfy the Department of Labor’s DFVC requirements for:

• ·       Forms 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan;

2.    file a paper Form 8955-SSA with the IRS for the same delinquent tax year filings; and

3.    meet the requirements of Notice 2014-35 (see below).

Plans Eligible for Relief

Retirement plans governed by Title I of ERISA that:

•    must file a Form 5500-series return (but not Forms 5500-EZ or 5500-SF for plans without employees); and

•    are eligible for DOL’s Delinquent Filer Voluntary Compliance Program.

Note: The IRS has a separate Form 5500-EZ Late Filer Program for relief from late filing penalties for non-ERISA plans that must file Forms 5500-EZ or 5500-SF because they cover only the owner, partner and spouses.

Who is eligible to participate in the DFVCP?

The DOL has stated that:

Plan administrators are eligible to pay reduced civil penalties under the program if the required filings under the DFVCP are made prior to the date on which the administrator is notified in writing by the department of a failure to file a timely annual report under Title I of the Employee Retirement Security Act of 1974 (ERISA). DFVCP is not available to plans that are not covered by Title I of ERISA. DFVCP relief is available only if the plan is required to file an annual report under Title I of ERISA. If a Form 5500-EZ is filed late, the plan administrator may request relief from the IRS for any applicable tax code penalties.

The relief under the DFVCP is available only to the extent that a Form 5500 is required to be filed under Title 1 of ERISA and for certain one-participant and foreign retirement plans under the pilot program issued in 2014 (subject to the reporting requirements of IRC §§ 6047(e), 6058, and 6059).

 The IRS has made this pilot program permanent for plan years 2015 and beyond

What is the Delinquent Filer Voluntary Compliance Program (DFVCP or DFVC Program)?

The Delinquent Filer Voluntary Compliance Program (DFVCP, DFVC Program) was adopted by the Department of Labor’s Employee Benefits Security Administration (formerly the Pension and Welfare Benefits Administration) in an effort to encourage delinquent filers to voluntarily comply with the annual reporting requirements under Title I of ERISA. As adopted, the DFVCP permitted eligible plan administrators the opportunity to avoid the assessment of civil penalties otherwise applicable to administrators who failed to file timely annual reports (commonly referred to as the Form 5500) by voluntarily complying with the filing requirements under Title I of ERISA and paying reduced civil penalties specified in the DFVCP.

In early 2013, the DOL updated the DFVCP to reflect the mandatory electronic filing requirement for the Form 5500 under EFAST 2. The updated DFVCP replaces the program adopted on April 27, 1995, and updated on March 28, 2002, and became effective on January 29, 2013. The updated program maintains the penalty structure that was announced in the 2002 update.

In an effort to further encourage and facilitate voluntary compliance by plan administrators with the annual reporting requirements of Title I of ERISA, the DOL updated the DFVCP by simplifying the procedures governing participation and lowering the civil penalty assessments thereunder.

According to DOL guidance, the penalty structure under the DFVCP is as follows:

•    Reduced per-day penalty: The basic penalty under the program was reduced from $50 to $10 per day for delinquent filings.

•    Reduced per-filing cap: The maximum penalty for a single late annual report was reduced from $2,000 to $750 for a small plan (generally a plan with fewer than 100 participants at the beginning of the plan year) and from $5,000 to $2,000 for a large plan.

•    “Per plan” cap: The DFVCP’s “per plan” cap is designed to encourage reporting compliance by plan administrators who have failed to file an annual report for a plan for multiple years. The “per plan” cap limits the penalty to $1,500 for a small plan and $4,000 for a large plan regardless of the number of late annual reports filed for the plan at the same time. There is no “per administrator” or “per sponsor” cap. If the same person is the administrator or sponsor of several plans required to file annual reports under Title I of ERISA, the maximum applicable penalty amounts would apply for each plan.

•    Small plans sponsored by certain tax-exempt organizations: A special “per plan” cap of $750 applies to a small plan sponsored by an organization that is tax-exempt under Internal Revenue Code Section 501(c)(3). The $750 limitation applies regardless of the number of late annual reports filed for the plan at the same time. It is not available, however, if as of the date the plan files under the DFVCP, there is a delinquent annual report for a plan year during which the plan was a large plan.

•    Top hat plans and apprenticeship and training plans: The penalty amount for “top hat” plans and apprenticeship and training plans was reduced to $750.

Questions about the DFVCP should be directed to EBSA by calling (202) 693.8360 or accessing its Web site at http://www.dol.gov/ebsa.

What are the minimum funding standards under ERISA?

A plan shall be treated as satisfying the minimum funding standard for a plan year if:

1.    In the case of a defined benefit plan that is not a multiemployer plan, the employer makes contributions to or under the plan for the plan year that, in the aggregate, are not less than the minimum required contribution determined under IRC Section 430 for the plan for the plan year;

2.    In the case of a money purchase plan that is not a multiemployer plan, the employer makes contributions to or under the plan for the plan year that are required under the terms of the plan;

3.    In the case of a multiemployer plan, the employers make contributions to or under the plan for any plan year that, in the aggregate, are sufficient to ensure that the plan does not have an accumulated funding deficiency under IRC Section 431 as of the end of the plan year.

What are the rights of veterans upon reemployment after a severance from service for military service?

The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) establishes that upon reemployment after a period of military service, participants are entitled to all rights and benefits based upon seniority that they would have accrued with reasonable certainty had they maintained continuous employment without the separation from service for military service (including basic seniority).

Depending on the length of the military service, a returning servicemember is entitled to take from one (for periods of service not exceeding thirty-one days) to ninety (for periods of service exceeding 180 days) days following the military service before reporting back to work. The employer is generally required to rehire the employee within two weeks of application for reemployment “absent unusual circumstances.”

Regulations make it clear that this period must be treated as service with the employer for purposes of eligibility, vesting, and benefit accrual.

With respect to qualified retirement plans, reemployed veterans are given an opportunity to make up elective deferrals that they would have made had it not been for the separation from service for military service. The compensation considered in making up salary deferrals will be the amount of compensation the reemployed veteran would have made from the employer had he not separated from service for military service. Where it would be difficult to establish the compensation the reemployed veteran would have been paid had he not incurred a separation from service, the plan must use the reemployed veteran’s average compensation from the twelve-month period preceding the break in service for military service. Any makeup of employee salary deferrals and matching contributions will not result in the plan’s violating the limits on contributions or minimum participation rules. The returning employee is not required to pay interest (lost opportunity costs) on made-up contributions.

If the missed elective deferrals cannot be made up by the employee, the employee will not receive the employer match or the accrued benefits attributable to his or her contribution, because the employer is required to make contributions that are contingent on or attributable to the employee’s contributions or elective deferrals only to the extent that the employee makes up payments to the plan.

Employer contributions that are not contingent on employee contributions (or elective deferrals) must be made no later than 90 days after the date of reemployment, or when plan contributions are normally due for the year in which the uniformed service was performed, whichever is later

Additionally, reemployed veterans will not be treated as having incurred any breaks in service for the period of time spent on active military duty. That period of time is to be considered service with the employer even though the veteran was actually in active military status. This rule applies to the plan’s rules regarding nonforfeitability of accrued benefits and for determining accruals under the plan.

Finally, the plan is permitted to suspend any requirement of loan repayments by participants during the period the participants are in active military service. If the returning employee withdrew part or all of his account balance prior to the military service, the employee must have buy-back rights, and must be allowed a certain amount of time to repay the amount withdrawn. In the case of a defined benefit plan, the employee must have the right to buy back the interest that would have otherwise accrued.

Regarding multiemployer plans, the regulations specify that a returning servicemember does not have to be reemployed by the same employer for whom the employee worked prior to the period of service in order to be reinstated under the plan with all of his or her USERRA rights. An employer of a returning servicemember who is entitled to benefits under a plan is required to notify the plan administrator of the reemployment within thirty days.

USERRA covers ERISA-qualified group health plans, including multiemployer plans. If the employee has coverage under such a plan, the plan must permit employees to elect to continue coverage for themselves and their dependents for a period of time that is the lesser of the twenty-four-month period beginning on the date on which their leave of absence for military service begins, or the date on which their absence for military service begins and ending on the date when they fail to return from service or apply for reemployment.

Regarding veterans’ reemployment rights under a health plan, the regulations describe two situations in which health coverage may be canceled upon departure for uniformed service:

1.       The departing employee fails to give advance notice of service and fails to elect continuation coverage; and

2.       An employee leaves for a period of service exceeding thirty days and gives advance notice of service but fails to elect continuation coverage.

If the employee is in active military service for less than thirty-one days, he or she cannot be required to pay more than the regular employee share, if any, for the health coverage. Employees in military service thirty-one or more days may be required to pay no more than 102 percent of the full premium under the plan, which represents the employer’s share, plus the employee’s share, plus 2 percent for administrative costs. Plans may also adopt reasonable rules allowing cancellation of continuation coverage if timely payment is not made.

However, if a departing employee who fails to give advance notice and fails to elect continuation coverage was excused from giving advance notice of service under USERRA’s provisions because of military necessity, impossibility, or unreasonableness, then coverage must be retroactively reinstated upon the employee’s election to continue coverage and upon his or her payment of all amounts due (no administrative reinstatement costs can be charged).

If the employee who has provided advance notice of leave exceeding thirty days but has failed to elect coverage subsequently elects to continue coverage, the scope of his reinstatement right depends upon whether the plan has developed reasonable rules regarding the period within which employees may elect continuing coverage. If reasonable rules have been established, then the plan must permit retroactive reinstatement of uninterrupted coverage upon the employee’s election and payment of all unpaid amounts due within periods established under the plan rules. If the plan has not established reasonable rules regarding the election period, it must permit retroactive reinstatement of uninterrupted coverage upon the employee’s election and payment of all unpaid amounts at any time during the maximum coverage period under USERRA.

The Veterans’ Housing Opportunity and Benefits Improvement Act of 2006(VHOBIA) extended employer health plan continuation and reinstatement rights to reservists entitled to the federal government’s health insurance program for all branches of the military. The program, known as TRICARE, provides health care coverage to civilian dependents of military servicemembers. VHOBIA extends TRICARE participation rights to active-duty reservists and their dependents upon being called to active duty. It also extends USERRA continuation coverage rights to reservists upon termination of active-duty status. The USERRA rights apply even if reservists’ active-duty orders are cancelled and they do not actually leave employment to perform active military service.

Reservists who receive active-duty orders with delayed effective dates are treated as if called to active duty for more than thirty days, starting on the later of the date the order was issued or ninety days before the date for active service. When these reservists are considered on “active duty,” they and their family members are eligible for military health and dental benefits under TRICARE.

Practitioner’s Pointer: An employer who fails to establish reasonable rules regarding the election period may find itself bound to longer maximum coverage periods than those otherwise mandated under USERRA.

The regulations indicate that where health plans are also covered by COBRA, it may be reasonable to adopt COBRA-compliant rules regarding election of and payment for continuing coverae, so long as those rules do not conflict with USERRA or the new cancellation rules. This has the effect of allowing plan sponsors to streamline their health plan administrative provisions by implementing applicable COBRA provisions already in place (except where they would violate USERRA).

The definition of “employer” under the final regulations excludes entities to which employers or plan sponsors have delegated purely ministerial functions, such as third-party administrators. The preamble to the final regulations indicates that the definition of employer was intended to apply to insurance companies administering employers’ health plans, “so that such entities cannot refuse to modify their policies in order for employers to comply with requirements under” USERRA, adding that employers with insured health plans are “obliged to negotiate coverage that is compliant with USERRA”

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act of 2008 into law.¹ The Heroes Act makes specific modifications to USERRA in an effort to assist veterans who die or become totally disabled while on active military duty and the beneficiaries of veterans who die on active military duty.

After December 31, 2006, the Heroes Act requires 401(k) and other qualified retirement plans to provide the survivors of a plan participant who dies while performing qualified military service with any additional benefits (such as accelerated vesting and ancillary life insurance benefits) that would have been provided if the participant had resumed employment and then died.

Another provision of the Heroes Act permits (but does not require) 401(k) and other qualified retirement plans to be amended to treat individuals who die or become disabled while performing qualified military service as if they had resumed employment in accordance with their USERRA reemployment rights on the day before death or disability, and then terminated employment on the date of death or disability. This provision allows a plan to provide such “deemed rehired employees” (or their survivors) partial or full retroactive benefit accruals that the plan must provide to reemployed service members under USERRA. These additional benefit accruals must be credited on a reasonably equivalent basis to all individuals who die or become disabled during their military service. Under this rule, when determining the amount of matching contributions, individuals are treated as having made deferrals based on their average deferrals for the 12 months immediately before qualified military service. This provision applies to deaths or disabilities occurring after December 31, 2006.

What plans are subject to ERISA’s vesting rules?

A plan will not be a “qualified” plan under IRC Section 401 unless it satisfies the minimum vesting standards established under IRC Section 411 (which are mirrored under ERISA Section 203(a). Under ERISA, these vesting rules apply to all pension plans that are established or maintained by any employer engaged in commerce or in any industry or activity affecting commerce, or by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce, or both. As such, both qualified and nonqualified plans that provide for retirement income or result in the deferral of income to termination or retirement are generally subject to the vesting requirements of ERISA.

What are the basic requirements for vesting under ERISA?

ERISA Section 203 establishes the minimum vesting standards for an ERISA-covered pension plan. Under that section, each pension plan must provide that an employee’s right to his normal retirement benefit is nonforfeitable upon the attainment of normal retirement age. ERISA Section 203(a)(1) states that an employee’s accrued benefit derived from the employee’s own contributions must, at all times, be conforfeitable.

Section 904 of the Pension Protection Act of 2006, has altered the mandatory vesting requirements for qualified benefit plans by eliminating ERISA Section 203(a)(4) and IRC Section 411(a)(12). The PPA also amended ERISA Section 203(a)(4) and IRC Section 411(a)(2) by providing that for plan years beginning after 2006, employer non-elective contributions must vest at least as rapidly as the mandated vesting schedules for employer matching contributions—that is, either a three-year cliff vesting schedule or a schedule of 20 percent after two years, 40 percent after three years, 60 percent after four years, 80 percent after five years, and 100 percent after six years. 

IRS Notice 2007-7 has clarified that employer discretionary contributions remitted to a plan trust prior to 2007 may remain under the pre-PPA vesting provisions of either a five-year cliff vesting schedule or a 3/20 schedule graduating at 20 percent per year after three years and culminating in 100 percent vesting after seven years. 

Most qualified retirement plans provide for a graduated vesting schedule on a “2/20” basis. That is a vesting schedule that provides for 2 percent vesting after two years of credited service and then increases the vesting percentage by 20 percent for each additional year of credited service until the participant becomes 100 percent vested. However, employer-matching contributions (as defined under IRC Section 401(m)(4)(A)) must be vested on a three-year cliff or six-year graded vesting schedule.

For defined contribution plans, the “accrued benefit” is the balance of assets allocated to the participant’s individual account. For purposes of a defined benefit plan, “accrued benefit” is defined as the employee’s accrued benefit as determined under the plan and expressed in the form of an annual benefit commencing at normal retirement age.

Both ERISA and the Internal Revenue Code generally prohibit any plan amendment that has the effect of decreasing accrued benefits under a plan. This would include any amendment increasing the vesting schedule. The IRS takes this provision very seriously and has disqualified plans for violations of this prohibition. Such violations are often referred to as the “death penalty” for qualified plans.

Does ERISA expressly exclude 403(b) tax sheltered annuities from ERISA coverage?

For purposes of ERISA, a program for the purchase of an annuity contract or the establishment of a custodial account as described under IRC Section 403(b), pursuant to salary reduction agreements or agreements to forgo an increase in salary and which satisfies the requirements of treasury regulations under Section 403(b), will not be considered “established or maintained by an employer” as that term is used in the definition of the terms “employee pension benefit plan” and “pension plan” if:  

1.    Participation is completely voluntary for employees; 

2.    All rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or any authorized representative of such employee or beneficiary;  

3.    The sole involvement of the employer is limited to any of the following:  

a.    permitting annuity contractors to publicize their products to employees,  

b.    requesting information concerning proposed funding media, products, or annuity contractors, 

 c.    summarizing or otherwise compiling the information provided with respect to the proposed funding media or products that are made available, or the annuity contractors whose services are provided, in order to facilitate review and analysis by the employees,  

d.    collecting annuity or custodial account considerations as required by salary reduction agreements or by agreements to forgo salary increases, remitting such considerations to annuity contractors, and maintaining records of such considerations,  

e.    holding in the employer’s name one or more group annuity contracts covering its employees, and 

f.    limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection that is designed to afford employees a reasonable choice in light of all relevant circumstances; and  

4.    The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by the employer

What type of group or group-type insurance programs are expressly excluded from ERISA coverage?

For purposes of ERISA coverage, the term “employee welfare benefit plan” does not include a group or group-type employee pay-all insurance program offered by an insurer to employees or members of an employee organization, under which:  

1.    No contributions are made by the employer or employee organization;  

2.    Participation in the program is completely voluntary for employees or members;  

3.    The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs, and to remit them to the insurer; and  

4.    The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.  

A U.S. District Court in Florida ruled that a disability plan originally maintained by an employer remains subject to the provisions of ERISA even after it becomes an employee pay-all welfare benefit arrangement.  

Such employers who pay all of an insurance program may, unintentionally, find themselves subject to ERISA where the employer or employee organization that has offered the program inadvertently endorses it (e.g., advising employees that the program offers a “valuable” extension of existing insurance coverage, or the marketing pamphlets for the program contain the employer or employee organization’s logos). 

What welfare benefit plans are not subject to ERISA?

The following welfare benefit arrangements are not subject to the general fiduciary provisions of ERISA:  

1.    Payroll practices that are established by an employer and that provide for payment by an employer to employees on account of overtime pay, shift premiums, holiday premiums or weekend premiums, sick pay, vacation pay, jury duty pay, and pay while on leave for military service;  

2.    The maintenance of on-premises facilities such as recreation, dining, or medical/first aid for the treatment of work-related injuries or illness occurring during normal work hours, or other facilities (excluding day care centers) for use by employees;

3.    Programs for the provision of holiday gifts such as turkeys or hams;

4.    Sales to employees of articles or commodities (whether or not they are offered at below-market prices) of the kind the employer offers for sale in the regular course of business;

5.    Hiring halls maintained by one or more employers, employee organizations, or both;

6.    Remembrance funds under which contributions are made to provide remembrances such as flowers, small gifts, or obituary notices on occasion of the illness, hospitalization, or death of an employee;

7.    Strike funds maintained by an employee organization to provide payment to its members during strikes and for related purposes;

8.    Industry advancement programs that have no employee participants and do not provide benefits, regardless of whether the program serves as a conduit through which funds or other assets are channeled to employee benefit plans subject to ERISA; and  

9.    Unfunded scholarship programs, including tuition and education reimbursement programs, under which payments are made solely from the general assets of an employer or employee organization

Which employee benefit plans does ERISA expressly exclude from coverage?

ERISA Section 4(b) establishes that the provisions of ERISA do not apply to any employee benefit plan if:  

1.    The plan is a governmental plan (as defined under ERISA Section 3(32));  

2.    It is a church plan (as defined in ERISA Section 3(33)) that has not made an IRC Section 410(d) election to have participation, funding, and vesting provisions apply;  

3.    It is maintained solely for the purpose of complying with applicable workers’ compensation laws or unemployment compensation laws or disability insurance laws;  

4.    It is maintained outside the United States primarily for the benefit of persons substantially all of whom are nonresident aliens; or  

5.    The plan is an unfunded excess benefit plan (as described under ERISA Section 3(36), which provides benefits for certain employees in excess of the limitations on contributions and benefits imposed by IRC Section 415). 

Family Caregiver, Maternal, and Paternal Leave

The Family and Medical Leave Act allows certain employees to take up to 12 weeks of unprotected, unpaid leave per year. This can be expanded upon by the state or the employer. The employer will continue to pay the employer-paid portion of your health premium (you may have to continue paying your portion of the premium during the leave). Upon returning from leave, you must be restored to the same job or an equivalent job. This means that, the leave does not guarantee that the actual job you held prior to going on leave will still be available and yours upon your return. However, you should get a job that is virtually identical in terms of pay, benefits, and other employment terms and conditions, including shift, location, and overtime. You should also be able to get any unconditional pay increases that occurred while you were on leave, such as cost-of-living increases. 

The Family Medical Leave Act allows you to take time off at any time during your pregnancy or even after childbirth within one year of your child’s birth. You may be able to take leave as a mother before and after having or adopting a baby, which is called maternity or pregnancy leave. Paternity leave for fathers is less common but is available at some firms. 

If enough leave is not provided by your employer, you may be able to negotiate for more leave or negotiate to work from home or on a flex schedule to better suit your adjustment to life with a new child.

Key Considerations and Regulations of Military Leave

Keep in mind that to get these military leave benefits, you must follow all applicable rules (including giving notice for the need to leave for military service). You must also be released from service under honorable conditions, and you must not exceed five years of military leave with any one employer (with some exceptions, such as annual training and monthly drills; these do not count against the cumulative total). The five-year limit does not include active duty training, annual training, involuntary recall to active duty, involuntary retention on active duty, voluntary or involuntary active duty in support of war, national emergencies, or certain operational missions.

There are also benefits for military caregivers. Military caregiver leave entitles an eligible employee who is the spouse, son, daughter, parent, or next of kin of a covered service member to take up to 26 work weeks of leave in a 12-month period to care for a covered service member with a serious injury or illness.

It’s important to note that you’ll have to report back to your civilian job in a timely manner and submit a timely application for employment. This timeliness depends on how long you were deployed for, so it’s important to keep track of all the rules and check off every box on your way back into civilian life.  Some other key considerations to keep in mind include the following:

• Make sure you thoroughly read through anything your employer has you sign since you may be signing something that waives some of your legal entitlements.  

• You must report back to your civilian job by the appropriate deadline, which can range from eight hours to 90 days depending on the length of service.  

• Military leave coverage may vary for National Guard members performing state service rather than federal service for deployment. 

Potential Risks of Military Leave

It is important to know which work benefits will be put on hold and what will stay in place. Don’t assume that disability insurance, life insurance, or any other benefits will stay in place while you are on leave, whether you are receiving pay from the employer, working part time for the employer, or just on leave. It is important to talk to your HR department so you know in advance what benefits will stay and what will disappear while you are gone.  

Generally, employers don’t have to pay the cost of health insurance if you’re on military leave unless you’re on leave for less than 31 days. For longer leaves, you may have COBRA rights, which may require you to pay the full cost of your participation in your employer’s health plan. If there are any lapses in paying any of the employer health insurance money due, you may find that even though your employer agreed to pay health insurance while you are on leave, your health insurance lapses and you are pushed onto a COBRA. So, it’s very important to keep up with all necessary payments because you may need to write checks for the coverage since you are not receiving paychecks from your employer, which would otherwise withhold pay and send medical insurance premiums to the insurer.  

If you have an FSA, you may find yourself in a position in which the Heroes Earnings Assistance and Relief Act (HEART) of 2008 (H.R. 6081) waives the “use it or lose it” clause of the FSA program. It’s important to know whether you will need to spend down any of this money for any given period and what happens to this money if something happens to you during deployment so all contingencies can be planned for.  

For dependent care reimbursement accounts, remember that you will have to maintain eligibility to use this money; otherwise, the money will no longer be available. For instance, if the spouse who is not deployed quits their job, the family may no longer be eligible for their dependent care reimbursement account. 

Potential Advantages of Military Leave

You are not required to use your vacation pay while on military leave like you may be required to for general leave. It may be worth thinking about using your vacation pay during the leave time to use optimal tax planning strategies and to provide additional income you may not otherwise realize if you do not return to your employer. For example, since pay while you’re deployed isn’t taxable, using your PTO first means you get paid tax free, and you can then take unpaid leave in another year to lower a second year’s taxes. This strategy is better than having to pay taxes for your PTO days and being in a higher tax bracket than necessary the following year. Any time when you are deployed and not paying taxes on ordinary income may also be a prime time to convert some of your retirement plan money into Roth IRA money.

Keep in mind that leave provided by the government is unpaid leave, so the employer may choose to provide some pay during your absence. Under certain cases, if you perform work for the employer while you are on military leave, you must be paid your full salary from the employer minus any military pay. Unpaid leave is required in some amount for certain employees. However, some companies may opt to cover non-required employees during leave, have extended leave, or provide a combination of these two solutions.

While deployed, the military provides its own benefit of allowing you to put up to $10,000 into a savings account, giving you a guaranteed interest rate of around 10% during the deployment period. It is generally worthwhile to maximize your contributions to this plan.

As long as you continue your health coverage, the full amount of your FSA, minus any prior expenses for the year, must be available to you at all times during your leave period. However, if your coverage under the health plan terminates while you are on leave, you are no longer entitled to receive reimbursement for claims during the period in which the coverage was terminated.

Military members returning from military leave who have defined contribution retirement plans must be given three times the period of their leave of absence, as long as it’s not greater than five years, to make up for any contributions missed during the leave period. This can be very beneficial in terms of allowing the military personnel to overcontribute to a deductible 401(k) plan, thus lowering their taxes for the years following the return from deployment.

It’s worth keeping four other potential advantages in mind:

• Your state may have greater protections than federal law, so it’s important to look at not only federal law but also what your state has passed to protect you before going on military leave.  
• For pension purposes, returning service members must be treated as if they have been continuously employed for purposes of participation vesting in accrual of benefits.  
• You may be able to take leave to care for yourself or certain family members (e.g., parents, relatives, or even non-relatives depending on your employer). 

Over-50 Catch-Up Contributions

For those who will reach age 50 before the year’s end, the limit on the amount you may contribute to a 403(b), 401(k), or 457 account increases by $6,000. This boosts the individual contribution limit from $18,500 to $24,500. 

General Breakdown of 401(k)s, 403(b)s, and 457 Plans 
When it comes to comparing 401(k)s, 403(b)s, and 457 plans, there are many similarities and few differences. The similarities include: 

• $18,500 contribution limit (2018);
• $6,000 over-50 catch-up contribution; 
• Risk of investing falls on employee; 
• Withdrawals taxed as ordinary income; and 
• Amounts deferred on a pre-tax basis. 

 The major differences include: 

• 403(b)s and 457s have additional catch-up deferrals, as discussed above; 

• 401(k)s are open to most employers, 403(b)s are open to tax-exempt and non-profit organizations, and 457s are open to state/local governments and some non-profit organizations; and  
• 457 plans may not be subject to early withdrawal penalties like 403(b)s and 401(k)s. 

Mingling Contributions Among 401(k)s, 403(b)s, and 457 Plans

If you have a 401(k) and a 403(b), the maximum amount you can contribute to both accounts combined is $18,500 (2018). If you have a combination of a 401(k) and/or a 403(b) paired with a 457 plan, the maximum you can contribute combined is $37,000: $18,500 to the 401(k) and/or 403(b) and $18,500 to the 457. Plus, you can make any catch-up contributions allowed. The money you save into each account should be in order of employer matching with the employer plan that matches you at the highest rate first, until the match is completely maximized; then the money should flow to the account with the second-best matching and so on until you have contributed your overall maximum contribution to all plans. 

457 Special Catch-Up Deferrals

Another catch-up tool available to 457 plan participants is the 457 special catch-up deferral. This allows plan participants who are three years away from attaining normal retirement age in their 457 plan to defer: 

• Twice the yearly limit on deferrals ($37,000 in 2018, which is two times the yearly maximum contribution of $18,500 in 2018) for the three years leading up to normal retirement age; or  

• The yearly limit on deferrals plus any amount allowed in prior years that you chose not to or could not contribute. Plans will keep an ongoing list of amounts you were allowed to defer in prior years, the amount you actually deferred, and any shortfall from those years. If you choose this option, they add up all your shortfall and allow you to contribute an amount equal to the shortfall over the next three years. 

For governmental 457 plans, this additional contribution cannot be paired with the over-50 catch-up, which makes it important to use the one that will provide you with the greatest benefit or largest contribution. 

15-Year 403(b) Catch-Up Deferrals

There may be a special provision in a 403(b) plan that allows an additional catch-up separate from the over-50 catch-up. The additional catch-up, which amounts to $3,000 per year, is available to employees who have provided the same employer with 15 years of service. The amount of the allowable 15-year catch-up deferral is calculated as the lesser of: 

• $3,000; or 
• $15,000 reduced by all prior 15-year catch-up deferrals; or 
• $5,000 x years of service, reduced by all prior elective deferrals (including all past 15-year catch-up deferrals) to your 401(k)s, 403(b)s, SARSEPs, or SIMPLE IRAs sustained by your employer. 

For employees who are eligible for the 15-year catch-up deferral and the over-50 catch-up, the 15-year catch-up deferral should generally be used first; the over-50 catch-up falls second in priority.

Optimizing Taxes: Backdoor Roth IRA Contributions

This unique strategy becomes available if your 401(k) plan allows you to roll over an IRA account into the 401(k) plan. Normally, single people making over $120,000 a year and married people filing taxes jointly making over $189,000 a year are limited in their ability to contribute to a Roth IRA (the income numbers are based on your Modified Adjusted Gross Income). By using the backdoor Roth IRA strategy, a highly compensated individual can contribute to a non-deductible IRA and convert it to a Roth IRA. The problem is that any Roth conversions must be done pro-rata across all IRA accounts. This means that, if you have a deductible IRA in addition to a non-deductible IRA being funded, any conversion of IRA money would be taken from both pre- and post-tax IRA accounts pro-rata. This creates a tax on the distributions from the deductible IRA where otherwise there would be none. 

To avoid this additional taxation, you could potentially transfer the deductible IRA money into your 401(k) and then convert the new non-deductible IRA contributions to a Roth IRA without creating a taxable distribution.