If you are an active member of the U.S. armed forces (referred to in this article as the "armed forces"), there may be times when you don't get a chance to make your IRA contribution by the yearly April 15 deadline. You may also be concerned about how your time in the armed forces affects your eligibility to participate in your employer's plan and receive plan benefits. Worry not! As a member of the armed forces, you are entitled to certain benefits that, for the purposes of determining your eligibility to receive things like employer contributions and the ability to become vested in those contributions, credit you with years of service. In this article, we will give an overview of these benefits.

Note: According to the IRS, "for federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard is also included, but not the U.S. Merchant Marine or the American Red Cross. However, these and other support personnel may qualify for certain tax deadline extensions because of their service in a combat zone."

Governing Law
Your employer may require that you perform services for a certain period of time in order to become eligible to receive and become vested in plan contributions. If you break employment for a certain period, you may be required to restart your eligibility service. A person who is an active member of the armed forces, however, is one of those exempt from this rule.

The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) provides that special consideration be given to individuals who serve in the armed forces. Under USERRA, active members of the armed forces must not suffer adverse consequences to their employment and retirement benefits as a result of being an active member of the armed forces.

Credit for Service
Generally, if you do not work more than 500 hours for the plan year, you incur what is referred to as a "break in service", which may affect your eligibility to participate in your employer's retirement plan or to be vested in contributions. However, if this break in service is a result of your service as an active member of the armed forces, it will not affect your eligibility. (For some background reading on retirement plans, check out Which Retirement Plan Is Best?)

An Example
Say you are required to work for two years in order to become eligible to participate in a profit-sharing plan and receive profit-sharing contributions. Your first year of employment is 2012. You worked for the full year in 2012, but you only worked for 499 hours in 2013. As of 2013, you have completed only one year of eligibility service because you did not work for more than 500 hours in 2013. However, if your reduced number of hours is a result of the time you served in a combat zone, and you are re-employed by that same employer, you will, as of the end of 2013, be credited the additional required time to meet the two-year service requirement.

Receiving Employer Contributions
If your employer maintains a defined-benefit plan, defined-contribution plan or a SEP or SIMPLE IRA, then the plan must include provisions for you to receive contributions that you would have received had you not been an active member of the armed forces. For instance, if you should have received a contribution of $1,000 for tax-year 2013, but you did not receive this amount because you were serving in a combat zone, your employer is required to contribute the $1,000 to your account, after you are re-employed.

Contributions made by your employer are based on compensation that you would have received had you not been an active member of the armed forces. Note however, that if your employer makes a matching contribution, which means you must first make a deferral contribution in order to receive the employer's, you will receive only the employer's contribution when you make the deferral contribution after you are re-employed. Generally, you are allowed three times the period in which you were active in the armed forces to make up the salary-deferral contributions that you missed, providing the period does not exceed five years.

What If the Contribution Exceeds the Limits?

Your Salary-Deferral Contributions
The contributions you make for the years you were an active member of the armed forces are not considered for determining the maximum amount you may contribute for the tax year. For instance, for tax year 2012, the maximum limit for contributing to a 401(k) plan as a salary-deferral contribution was $16,500. However, if, you made a contribution for the 2013 tax year because your service to the armed forces had prevented you from doing so in 2012, you would be allowed to contribute up to $34,000 ($16,500,for 2012 and $17,500 for 2013.)

Your Employer
To ensure that your employer is not in violation of the IRS contribution limits, the provisions of USERRA exempt your employer from any penalties that would generally apply to excess contributions. For instance, say your employer is allowed to contribute up to $5,000 on your behalf for the 2013 plan year. This limit is based on total eligible compensation paid to you for 2013 and the contribution limit as set by the qualified plan and the IRS. However, because you were serving in a combat zone in 2012, you did not receive your employer contribution of $5,000 for 2012. Your employer was allowed to contribute $10,000 on your behalf for 2013.

Repaying Your Qualified Plan Loan
If you received a loan from your qualified plan, the amount must be repaid within five years unless the loan was used toward the purchase of a primary residence. This five-year period may be extended for the period you were an active member of the armed forces. (For more insight, see Qualified Plan Loans: Guidelines To Operations.)

Making Your IRA Contribution
Generally, for armed-forces personnel serving time in a combat zone, the IRS allows an automatic extension for filing tax returns and taking tax-related actions, such as making IRA contributions. For these individuals the deadline, which is usually April 15, is extended to at least 180 days after either of these two dates:

  • The last day of qualifying combat zone service.
  • The last day of any continuous qualified hospitalization for injury from service in the combat zone.

Documentation Requirements
Consult with your IRA custodian to determine if there are any specific documentation requirement for handling these IRA contributions. Also, your employer may require documentation to make these special allowances on your behalf. Consult your employer or human resources representative.

The Bottom Line
If you are a member of the armed forces, your time in the combat zone can impact your contributions to your retirement plan. However, the IRS has provisions in place to help armed forces personnel work around these obstacles. Be sure you understand what provisions are available to you.

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