IRS Provides Additional Guidance on In-Plan Roth Rollovers
Under the Small Business Jobs Act of 2010 (SBJA), plan participants have had the ability since 2010 to roll over certain amounts in a 401(k), 403(b) or governmental 457(b) plan to a designated Roth account in the same plan. However, the amounts rolled over had to be eligible for distribution from the plan.
As provided by the American Taxpayer Relief Act of 2012 (ATRA), beginning in 2013 a plan may also provide for in-plan Roth rollovers of amounts that would not otherwise be distributable under Internal Revenue Code (IRC) section 402A(c)(4)(E).
On December 11, 2013, the Internal Revenue Service (IRS) released Notice 2013-74 that gives additional guidance on these in-plan Roth rollovers.
IRS Notice 2013-74
Regardless of the participant’s age, a plan may now permit in-plan Roth rollovers of the following
- Elective deferral
- Matching contributions, including safe harbor 401(k) matching contributions
- Nonelective contributions, including safe harbor 401(k) nonelective contributions
- Earnings on plan investments
In Internal Revenue Notice 2013-74, the IRS extended the deadline to adopt a discretionary plan amendment to allow in-plan Roth rollovers in 2013 related to amounts in a plan that could not otherwise be distributed to the participant.
Adding the ability to rollover non-Roth account balances is considered a discretionary amendment that ordinarily must be adopted by the end of the plan year in which it is effective. The IRS, though, has allowed for the following extended deadlines for the adoption of plan amendments:
- 401(k) and governmental 457(b) plans must adopt the amendment by the later of the end of the plan year in which it is effective or December 31, 2014.
- Safe Harbor 401(k) plans have a temporary period to adopt this amendment mid-year that ends on December 31, 2014.
- 403(b) plans have until the later of the last day of the plan’s remedial amendment period (a future date not yet announced by IRS) or the last day of the plan year the amendment is effective.
The above deadlines apply to the following plan amendments:
- Rollovers of non-Roth account balances that are otherwise eligible for distribution to a Roth account.
- Rollovers of non-Roth account balances that are not otherwise eligible for distribution to a Roth account.
- Allowing Roth contributions to the plan.
- Accepting rollover contributions by a designated Roth account.
Rules for In-Plan Roth Rollovers of Otherwise Non-Distributable Amounts
Notice 2013-74 provides that:
- The Roth rollover is restricted to vested account balances only.
- The plan must separately account for any in-plan Roth rollovers of otherwise non-distributable amounts.
- The amounts rolled over remain subject to the distribution restrictions that applied to them before the in-plan Roth rollover. In other words, if the contribution type was not eligible for distribution prior to the rollover, it will not be after the rollover.
- The rollover must be direct; 60-day rollovers are not permitted if the amount was otherwise nondistributable.
- Income tax withholding does not apply and, therefore, a 402(f) notice is not required.
Adding or Removing Roth Provisions
A plan is not required to offer designated Roth accounts or in-plan Roth rollovers. A plan can limit the types and amounts of contributions eligible for Roth rollovers and the frequency of rollovers. For example, a plan could provide that only otherwise distributable amounts are eligible for in-plan Roth rollovers.
A plan may also discontinue the availability of in-plan Roth rollovers. A participant’s ability to make in-plan Roth rollovers is not protected by the anti-cutback rules under Internal Revenue Code Section 411(d)(6).
Plan sponsors that may want to implement the new in-plan Roth conversion options under their plan should carefully consider the potential level of utilization by plan participants as the additional administrative costs may outweigh the value of the provisions to plan participants.
Trends & Developments - February 2014