Friday, January 3, 2014

IRS Provides Guidance on In-Plan Roth Rollovers

The American Taxpayer Relief Act of 2012 amends the requirement that employees wait until a distributable event (i.e., age 59½, termination, death or disability) for an in-plan Roth conversion. With the release of Notice 2013-74, the Internal Revenue Service (IRS) provides additional guidance on in-plan Roth conversions.

The Small Business Jobs Act of 2010 permitted retirement plans that provided for Roth contributions to allow employees to roll over amounts (other than designated Roth contributions) from their retirement plans to their Roth account in the plan. However, the amounts that could be rolled over were limited to amounts that were otherwise distributable under the plan. Thus, unless an employee had met a distributable event, a rollover was not possible. Section 902 of the American Taxpayer Relief Act of 2012 expanded the type of amounts that are eligible for an in-plan Roth rollover. 

IRS Notice 2013-74 provides that the following contributions (and any related earnings) may be rolled over to a designated Roth account within the retirement plan, regardless of whether the participant has met a distributable event: elective deferrals in 401(k) and 403(b) plans, matching and non-elective employer contributions, and deferrals made to a governmental 457 plan. Any employer contributions rolled over must be fully vested. Any amounts rolled over remain subject to the same distribution restrictions that were applicable before the in-plan rollover.

It is important to note that any in-plan rollover to a Roth account of amounts that would otherwise not be distributable (i.e., the participant has not met a distributable event), is not subject to withholding and no part of the rollover may be withheld at the election of the participant. Thus, employees electing to make such a rollover will need to make allowances for the additional income tax that will be due as a result of the conversion, either through increased withholding or payment of estimated taxes, to avoid an underpayment penalty.

Any plan wishing to add an in-plan Roth rollover option must amend its plan document. Generally, such amendments must be adopted no later than the last day of the first plan year in which the amendment is effective. However, to give plan sponsors sufficient time to amend their plans and allow for employees to make in-plan Roth rollovers for 2013, IRS has extended the deadline to the later of the last day of the first plan year in which the amendment is effective or December 31, 2014. Thus, for a calendar year 401(k) plan that wishes to allow in-plan rollovers for 2013, the amendment must be adopted by December 31, 2014.

If you have questions about adding a Roth contribution to your plan or amending your plan to allow for in-plan Roth rollovers as outlined in IRS Notice 2013-74, contact us at (800) 388-1963 or at hbs@hanys.org.