Military Service and Reemployment

You may have an employee who has left employment with your company to serve time with the military.  Provisions relating to military service are outlined in the Uniformed Services Employment and Reemployment Rights Act (USERRA) of 1994. 

The U.S. Department of Labor (DOL) published final rules interpreting USERRA that became effective on January 18, 2006.  USERRA applies regardless of the number of employees in your company.  As an employer, you cannot discriminate against any employee or prospective employee with regard to hiring, retention, and promotion, or any benefit of employment because of military service.  Your qualified retirement plan is a benefit of employment that is affected by USERRA. 

This article will address military service and your qualified retirement plan. 

If an employee leaves employment to serve in the military and then returns to employment, his or her military service is treated as continuous employment with your company for purposes of determining the individual=s rights in the retirement plan.  This continuous employment concept applies for purposes of determining eligibility for participation in the plan, make-up contributions, accrual of service credits, and vesting rights.

USERRA provides rights and benefits only to employees of an employer. An independent contractor is not covered by USERRA.  Generally, USERRA applies to an employee who:

• Is absent from employment due to military service.

• Provided advanced notice of his or her uniformed services.

• Returns to employment after serving no more than 5 years in the military.

• Returns to employment, or applies, in a timely manner after the end of the military service.

• Is discharged from military service on an honorable basis.

Employees are protected for a cumulative period of five years of absences caused by military leave. Some types of leave, such as leave for boot camp, are protected without limitation and would not count toward using up the five year time period.

A service member must notify your company of their intent to return to work.  The required timing of the notice they provide depends on their length of military service:

•          • For military service less than 31 days:  a service member must report to your company on the next work period following the completion of service, plus eight hours allotted for an eight hour rest period.

•          • For military service of 31-180 days:  a service member must report to your company no later than 14 days after the completion of service, or the next full calendar day if reporting within that time period is impossible.

•           • For military service greater than 180 days:  a service member must report to your company no later than 90 days after the completion of service.

Each of these periods can be extended up to two years if an employee is convalescing from a service related illness or injury. 

Your company does not have to provide USERRA protection where:

•           • Reemployment is impossible or unreasonable due to changes in the business.

•           • Reemployment would create undue hardship for the company because the veteran has certain disabilities or lacks qualification for the position.

•           • The employment prior to the military service was intended to be temporary.

Make-Up Employee Contributions
If a service member would have had the right to contribute to the plan had he or she been in continuous employment with your company, then USERRA requires the plan to make such right available upon reemployment. This includes the right to make elective deferrals and the right to make after-tax employee contributions (if applicable).  The time frame during which make-up deferrals or contributions must be made by a reemployed service member is the lesser of three times the length of the military service period or 5 years from the date of reemployment. Where the plan provides a match on such contributions, the employer would be required to fund the match, but only upon the employee=s making the elective deferrals or contributions that are eligible for a match.

Compensation
The employee's imputed compensation while on military leave is based on the rate of pay he would have received but for the absence.  If the compensation he would have received is not reasonably certain, the employee's average compensation from the company during the 12-month period immediately preceding the qualified military service (or the entire period of employment, if shorter) would be used.

Make-Up Employer Contributions
Your company is required to make-up any employer contribution the service member did not previously receive on account of the military service period.

You may deduct any make-up contribution in the year it is made, or for the prior year if the contribution is made no later than the due date for filing the employer's Federal tax return for that prior year.  Whether the amount of the contribution is deductible, however, would be based on the applicable deduction limit for the year the contribution relates to. The deduction limit for the current tax year is not relevant, even though you would be taking the deduction on the company tax return filed for that year.

Your company must make any make-up contribution that is not dependent on elective deferrals (e.g. profit sharing contributions) by the later of 90 days after the service member is reemployed or the date your company would normally make contributions for the year the make-up applies.

Employee Notice
Your company is required to provide to employees a notice of the rights and obligations under USERRA.  The notice may be distributed by hand, by mail, electronically or it may be displayed at the worksite where other required notices are customarily posted. The DOL provides a poster that may be used to satisfy this notice requirement.  The poster can be downloaded from:  http://www.dol.gov/vets/programs/userra/USERRA_Private.pdf

Example:
Beth is hired on February 5, 2003 and is a full-time employee.  She enters the plan on March 1, 2004.  She leaves the company to serve in the military on June 5, 2004.  She returns to employment on March 20, 2005 and works full time through December 31, 2005.

Beth was paid $12,300 from January 1 through June 5, 2004.  She would have received $21,700 for the rest of the year if she had continued in employment.

Example: Eligibility for the Plan
Beth’s time on military leave is considered time with the employer.  Therefore, she enters the plan immediately upon rehire on March 20, 2005 because she is considered as never having left the plan.

Example: Make-Up Elective Deferrals
Beth has the right to make up elective deferrals with respect to her military service period, based on the compensation she would have earned for that period. During 2005, Beth makes the maximum deferrals for which a match is provided under the plan for that year, and also makes deferrals in the amount of 6% of the compensation she would have received during her military absence in 2004, which represents the maximum amount that was subject to a match for 2004.

The make-up deferrals for 2004 do not count toward the 2005 401(k) limit and are not included in the ADP discrimination test for that year.  The 2004 make-up deferrals do count toward the 2004 401(k) limit.  However, the make-up deferrals are not subject to ADP discrimination testing for any year (not even for 2004).

Example: Make-Up Employer Contributions
The company must provide Beth make-up matching contribution on the elective deferrals she made for 2004.  The make-up matching contributions would follow the matching formula used for 2004.  The make-up matching contributions that apply to 2004 are not subject to ACP discrimination testing for any year.

The employer's make-up contribution to the profit sharing plan is the amount Beth would have received for the 2004 plan year, based on $21,700 of compensation.  She is also entitled to a make-up contribution on her actual compensation paid from January 1 through June 5, 2004 (i.e., $12,300) if her entitlement to such contribution is not established until she returns from military service (e.g., because of a last day employment rule under the plan). 

If the profit sharing plan requires 1,000 hours of employment during the plan year and employment on the last day of the plan year to share in allocations, Beth is treated as being employed on December 31, 2004 for purposes of determining her benefit entitlements.