Section 105 – Treatment of Differential Military Pay as Wages of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) discusses the treatment of differential military pay as wages. It defines a differential wage payment as a payment made by an employer to an individual performing military service that represents the pay they would have received if they were working for the employer. Effective after December 31, 2008, differential pay is treated as compensation, subject to withholding, reported on IRS Form W-2, and treated as compensation for qualified plan purposes (eligible for 401(k), matching, and other contributions). Differential Pay as Plan Compensation discusses the qualified plan implications:

Section 105 of the HEART Act created IRC Code Section 3401(h) requiring all differential pay that is paid after December 31, 2008 to be treated as W-2 wages, subject to Federal income tax withholding purposes. New Code Section 414(u)(12) provides for qualified plan contributions to be made on differential pay, and that these amounts are to be treated as if the individual were an employee of the employer making the payment. As a result, an employee can make elective deferrals on differential pay and employers will need to offer matching contributions and/or non-elective contributions (if applicable). The HEART Act ensures that a retirement plan will not be in violation of discrimination rules by providing additional benefits to these members of the military, however, an employer must ensure that differential wage payments are made on a nondiscriminatory basis. Plans that are members of a controlled group should also confirm that all members of the group are following the same methodology regarding differential wage payments.