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IRS Issues Guidance for Administration and Reporting of In-plan Roth Rollovers

On November 26, 2010, the IRS issued Notice 2010-84 (the Notice) containing guidance for 401(k) and 403(b) plans with respect to the administrative and reporting requirements for the in-plan Roth rollover features provided for under the Small Business Jobs Act of 2010 ( the Act). This Alert is an update to our Alert of October 6, 2010 discussing the provisions of the Act. Notice 2010-84 provides important guidance for plan sponsors that want to implement the in-plan Roth rollover feature before the end of 2010.

Plan Document and Disclosure Requirements

Plan Amendments 

The Notice provides sponsors of 401(k) and 403(b) plans with an extended deadline to amend their plan documents to allow for 2010 in-plan Roth rollovers provided the effective date of the amendment is the date the plan first offered the in-plan Roth rollover feature. The deadlines for plan amendments are as follows:

  • 401(k) plans have until the later of the last day of the year in which the amendment is effective or December 31, 2011.
  • Safe harbor 401(k) plans have until the later of the day before the first day of the plan year in which the safe harbor plan provisions are effective or December 31, 2011.
  • 403(b) plans have until the later of the plan’s remedial amendment period (described in IRS Announcement 2009-89) or the last day of the first plan year in which the amendment is effective.

The provisions of the Act apply to governmental 457(b) plans beginning in 2011. Accordingly, such plans may adopt a plan amendment to include a designated Roth account after December 31, 2010, and then also allow in-plan Roth rollovers.

An eligible plan that did not previously allow in-service distributions can be amended to limit new in-service distributions from the plan’s non-Roth accounts exclusively for the purpose of a participant rolling over the distribution in an in-plan Roth direct rollover. However, the plan cannot impose this limitation on any existing distribution options available under the plan.

Written Explanation to Participants - 402(f) Notice 

If a plan is amended to offer in-plan Roth rollovers, it will be required to include a description of this feature in the written explanation (402(f) Notice) the plan sponsor is required to provide to participants who receive an eligible rollover distribution. The Notice describes how the language of a 402(f) Notice with safe-harbor explanations can be revised to include the language necessary for the in-plan Roth rollover option.

Administrative Guidance

Eligible Plan Participants 

In addition to current plan participants, surviving spouse beneficiaries and alternate payees who are the current or former spouse of a participant are also eligible to do an in-plan Roth rollover.

Types of In-plan Roth Rollovers 

The Notice provides for two types of in-plan Roth rollovers. The first is an ‘in-plan Roth direct rollover,’ which is accomplished when a plan trustee transfers an eligible rollover distribution from a participant’s non-Roth plan account to the participant’s designated Roth plan account within the same plan. The second type of in-plan Roth rollover is an ‘in-plan Roth 60-day rollover.’ Under the Notice’s provisions, a plan participant may receive an eligible rollover distribution of the amounts from their non-Roth plan accounts and then deposit the distribution within 60 days of receiving it into a designated Roth account in the same plan.

Important Note: Unlike a conversion or rollover to a Roth IRA, a participant may not recharacterize any amount of an in-plan Roth rollover.

Observation: Given that the intent of the Act was to stop asset leakage from qualified retirement plans, this provision may seem to be counter productive. However, it is likely that IRS wanted to give those participants who have recently taken a distribution to make a conversion to a Roth IRA the opportunity to return the distributed amounts to their employer’s plan. 

'In-Plan Roth Direct Rollovers' Not Treated as a Distribution 

Under the Notice an ‘in-plan Roth direct rollover’ is not treated as a distribution for the following purposes:

  • Transferring a plan loan to the designated Roth account without changing its repayment schedule (the loan balance will be taxable as part of the Roth rollover);
  • Requiring spousal consent;
  • Requiring a participant’s consent before an immediate distribution of an accrued benefit of more than $5,000; and
  • Eliminating a participant’s right to optional forms of benefit.

Observation: This implies that ’in-plan Roth 60-day rollovers’ are treated as distributions for the above purposes. 

Taxation and Withholding 

In-plan Roth rollovers are not subject to the 10% additional tax on early distributions and an ‘in-plan Roth direct rollover’ is not subject to the mandatory 20% withholding. A ’in-plan Roth 60-day rollover’ apparently will be subject to the mandatory 20% withholding, meaning that a participant that would like use of the amount distributed for 60 days will need to make-up the 20% from other sources to complete an ’in-plan Roth 60-day rollover’

If a plan distributes any part of an in-plan Roth rollover within a five-year period, the distribution will be subject to the 10% additional tax on early distributions unless an exception to this tax applies or the distribution amount is allocable to a nontaxable portion of the in-plan Roth rollover. The five-year period begins on January 1 of the year of the in-plan Roth rollover and ends on the last day of the fifth year of that period. This rule does not apply if the participant rolls over the distribution to another designated Roth account or to his or her Roth IRA.

Special Tax Rules for 2010 In-Plan Roth Rollovers 

A participant will generally report the taxable amount of an in-plan Roth rollover in the tax year in which they receive the distribution. However, for in-plan Roth rollovers completed by December 31, 2010, a participant may at their election:

  • report half of the taxable amount in 2011 and the other half in 2012 (two-year income spread), or
  • report the entire taxable amount in 2010.

If a participant elects to include the taxable amount in 2010, it will apply to all of their in-plan Roth rollovers in 2010 and they may not revoke the election after the due date (including extensions) of their 2010 tax return.

Plan Sponsor Form 1099-R Reporting – In-plan Direct Rollovers 

According to the IRS, plan sponsors should report 401(k) and 403(b) ‘in-plan Roth direct rollovers’ on a Form 1099-R as follows:

  • Include the amount rolled over in box 1 'Gross distribution'
  • Include the taxable amount rolled over in box 2a 'Taxable amount'
  • Do NOT check box 2b 'Taxable amount not determined'
  • Report the basis in the amount rolled over in box 5 'Employee contributions'
  • Use distribution code 'G' in box 7

As noted above, plans are not required to withhold 20% for an in-plan Roth direct rollover.

Further, plans should report any distributions made in 2010 from designated Roth accounts allocable to an in-plan Roth rollover on a separate Form 1099-R. The distribution should be reported as would any other distribution from a designated Roth account. However, in the blank box to the left of box 10, the plan sponsor should enter the amount of the distribution allocable to the in-plan Roth rollover.

For more information, please contact EisnerAmper partner Peter Alwardt.

This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

The material contained in this presentation is for general information and should not be acted upon without prior professional consultation.  

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