Employee Benefits-IRS Provides Guidance On Reporting Conversions Of Amounts Held In 401(k) and 403(b) Plans to Roth Contributions In The Same Plan, And Says That 20% Withholding Does Not Apply

Section 2112 of the Small Business Jobs Act allows a participant in a 401(k) plan or a 403(b) plan to make a direct rollover of the amounts held in his or her account under that plan to a designated Roth account in the same plan (“in-plan Roth conversion”) after September 27, 2010. The taxable amount rolled over is includible in income equally in 2011 and 2012, unless the taxpayer elects to include all of it in 2010. The additional tax under section 72(t) does not apply to these rollovers.

In “Changes to Current Tax Forms, Instructions, and Publications” on the IRS’s website, the IRS provides guidance on reporting these conversions. According to the website, the conversion should be reported on Form 1099-R as follows. The total amount converted should be reported in box 1 (Gross distribution). The taxable amount should be reported in box 2a. Any basis in the amount converted should be reported in rollover in box 5 (Employee contributions). Code G should be inserted in Box 7.

Mandatory 20% withholding does not apply to in-plan Roth conversions.

The IRS website further indicates that distributions made to a participant in 2010 from a designated Roth account must be reported on a separate Form 1099-R. The portion of a distribution from a designated Roth account that is allocable to an in-plan Roth conversion must be reported on that form. The distribution should be reported in the same manner as any other distribution from a designated Roth account. However, in the blank box to the left of box 10, enter the amount of the distribution allocable to the in-plan Roth conversion.