The Heroes Earnings Assistance and Relief Tax Act of 2008, known as the HEART Act, is a federal law signed by President George W. Bush on June 17, 2008, that expands tax breaks and retirement plan protections for U.S. service members, their families, and their survivors, and also imposes an exit tax on certain individuals who give up U.S. citizenship. It reshaped how employer retirement plans handle military leave, how combat pay counts for tax credits, how survivors can use military death benefits, and how employers are rewarded for topping up a deployed employee’s pay.
Retirement Plan Protections During Military Service
The HEART Act built on the Uniformed Services Employment and Reemployment Rights Act of 1994, which already treated military leave as continuous employment for vesting. The 2008 law added protections that reach further into the mechanics of 401(k)s, IRAs, and pension plans.
Survivor Benefits If a Participant Dies on Duty
IRC Section 401(a)(37), added by the HEART Act, requires qualified retirement plans to give the survivors of a participant who dies during qualified military service the same benefits the survivors would have received if the participant had returned to work and then died as an active employee. That includes accelerated vesting and any ancillary survivor benefits such as life insurance. It does not require the plan to credit additional benefit accruals for the period of military service itself. These protections apply to deaths and disabilities occurring on or after January 1, 2007.
Employers may go further under IRC Section 414(u)(9) and treat a service member who dies or becomes disabled during military duty as if they had been rehired the day before. If an employer opts in, benefit accruals are calculated based on the individual’s average contributions during either the 12 months before military service or the full length of their prior continuous employment, whichever is shorter. The option must be offered on reasonably equivalent terms to all employees performing qualified military service.
Differential Wage Payments
Many employers voluntarily pay a deployed employee the difference between civilian salary and military pay. Before the HEART Act, that money was treated as self-employment income on Form 1099-MISC. Starting January 1, 2009, the law reclassified those “differential wage payments” as regular wages, subject to income tax withholding and reported on Form W-2. That reclassification lets the payments count as compensation under an employer’s retirement plan, so a deployed employee can keep making elective deferrals and receiving employer matches.
A plan that includes differential wage payments in its compensation definition will not fail IRS nondiscrimination testing on that ground, as long as the benefit is offered on reasonably equivalent terms to all participants. Plans may also treat a service member receiving differential pay as having “severed from employment” for distribution purposes. If a plan allows distributions on that basis, the individual is barred from making new elective deferrals for six months after the distribution.
Qualified Reservist Distributions
Reservists called to active duty for more than 179 days, or for an indefinite period, may withdraw funds from IRAs or from elective deferral accounts in 401(k) and 403(b) plans without owing the 10 percent early-withdrawal penalty that normally applies before age 59½. The Pension Protection Act of 2006 first created this exception with a December 31, 2007 sunset. The HEART Act made it permanent.
A reservist who takes such a distribution can repay it into an IRA during the two-year period beginning the day after active duty ends. Those repayment contributions sit outside the standard annual IRA contribution limits and are not tax-deductible.
Suspended Plan Loans
The HEART Act clarified that leaving for active duty does not have to be treated as a severance from employment for 401(k) plan loans, which would otherwise trigger a deemed default. A plan may suspend loan repayments for the entire period of military leave, even if it runs longer than a year, and extend the loan term by the length of that service. Interest keeps accruing during the suspension, though the Servicemembers Civil Relief Act caps that interest at 6 percent per year during military service. When the service member returns, repayments resume in substantially level installments, either at the original amount with a balloon payment at the end or through reamortization of the remaining balance.
Tax Breaks for Service Members and Survivors
Combat Pay Election for EITC and Child Tax Credit
The HEART Act permanently allows service members to elect to include nontaxable combat zone pay as earned income when calculating the Earned Income Tax Credit and the refundable Child Tax Credit. The election is optional and all-or-nothing: if including combat pay produces a larger credit, the taxpayer must count all of their nontaxable combat pay rather than a partial amount. Spouses who both receive combat pay may each make the election independently. Nontaxable combat pay appears on Form W-2, Box 12, with code Q.
Rolling a Death Gratuity or SGLI Payment Into a Roth
A survivor who receives a military death gratuity or Servicemembers’ Group Life Insurance payment can roll those funds into a Roth IRA or a Coverdell Education Savings Account. These rollovers are exempt from normal annual contribution limits. The total rolled over cannot exceed the combined death gratuity and SGLI payments received, reduced by any portion already contributed to another Roth IRA or Coverdell account, and the rollover must be completed within 12 months of receiving the payment.
The principal contributed under this provision can be withdrawn at any time without taxes or penalties. Earnings on the contributions follow standard Roth IRA rules, including the five-year seasoning requirement. Survivors hold these accounts at private financial institutions, and the Department of Veterans Affairs offers beneficiary financial counseling to help with the process.
What Employers Have to Do
Employers were required to amend their qualified retirement plans to reflect the HEART Act. The strictly mandatory amendment is under IRC Section 401(a)(37), extending survivor benefits to beneficiaries of participants who die during qualified military service. It applies to all qualified plans, including defined benefit plans, 403(b) annuities, and governmental 457(b) plans.
IRS Notice 2010-15 set the compliance deadlines. Non-governmental plans had to adopt amendments by the last day of the first plan year beginning on or after January 1, 2010. Governmental plans had until the last day of the plan year beginning on or after January 1, 2012. Plans had to operate in compliance with the HEART Act’s terms immediately, even before formal amendments were in place, and to apply the amendments retroactively to the effective dates.
Employers that missed those deadlines can still fix the failure through the IRS Employee Plans Compliance Resolution System, governed by Revenue Procedure 2021-30. Late plan amendments do not qualify for no-fee self-correction and must go through the Voluntary Correction Program, which involves filing Form 14568, paying a user fee, and getting an IRS compliance statement. If the IRS finds the failure during an audit instead, the costlier Audit Closing Agreement Program applies.
Employer Tax Credit for Differential Pay
IRC Section 45P, created by the HEART Act, gives employers a tax credit equal to 20 percent of differential wage payments made to a qualified employee on active duty, on up to $20,000 of payments per employee per year. The maximum credit works out to $4,000 per employee. To qualify, the employee must have worked for the employer for at least 91 days before the period covered by the differential payments.
As originally enacted, the credit was limited to small businesses with fewer than 50 employees and carried an expiration date. It lapsed at the end of 2014 and was revived by the Protecting Americans from Tax Hikes Act of 2015, which removed both the expiration and the small-business size cap for taxable years beginning after December 31, 2015. An employer subject to a federal court order for violating the employment or reemployment rights of reservists cannot claim the credit for the year of the order or the two following tax years.
Mortgage Bond Access for Veterans
The HEART Act loosened the rules on tax-exempt mortgage revenue bonds for veterans. Under 26 U.S.C. § 143(d)(2)(D), the law waived the “three-year requirement” — which normally limits mortgage bond financing to first-time homebuyers who have not owned a principal residence in the prior three years — for veterans as defined under federal law. A veteran who has not previously used the waiver can obtain mortgage bond financing regardless of prior homeownership. Before the change, this affordable-loan avenue was effectively limited to a handful of states with existing qualified veterans’ mortgage bond programs.
The Expatriation Tax
Not every part of the HEART Act is a military benefit. The same law overhauled the tax treatment of individuals who renounce U.S. citizenship or abandon long-term permanent resident status. IRC Section 877A imposes a “mark-to-market” exit tax on “covered expatriates” who expatriate on or after June 17, 2008.
A covered expatriate is treated as having sold all worldwide property for fair market value on the day before expatriation. Gain above an inflation-adjusted exclusion (\$890,000 for 2025) is included in gross income and taxed that year. A person is a covered expatriate if any one of three tests is met: average annual net income tax liability above an inflation-adjusted threshold (about \$206,000 for 2025) over the five years before expatriation, net worth of \$2 million or more on the expatriation date, or failure to certify five-year tax compliance on IRS Form 8854. Failing to file Form 8854 can trigger a \$10,000 penalty. Deferred compensation, specified tax-deferred accounts, and interests in nongrantor trusts are taxed under separate rules rather than the mark-to-market calculation, and the Section 121 exclusion for the sale of a principal residence does not apply to a deemed sale under Section 877A.