Employee Benefits-IRS Provides Guidance On Rollovers Of Amounts Held In 401(k) and 403(b) Plans to Roth Accounts In The Same Plan

In Retirement News for Employers – Fall 2010 Edition, the Internal Revenue Service (“IRS”) provides guidance on rollovers of amounts held in 401(k) and 403(b) plans to Roth accounts in the same plan (“in-plan Roth rollovers”). These rollovers allow a participant to convert retirement savings in the plan to Roth contributions. Here are the highlights:

An “in-plan Roth rollover” is a rollover, made after September 27, 2010, of an eligible rollover distribution (an “ERD”) from a non-Roth account in a 401(k) plan or 403(b) plan into a designated Roth account in the same plan. A non-Roth account means any plan account that does not hold designated Roth contributions. Besides plan participants, surviving spouse beneficiaries and alternate payees who are current or former spouses are eligible to make an in-plan Roth rollover. Unlike a conversion or rollover to a Roth IRA, a participant may not recharacterize any portion of an in-plan Roth rollover. If an outstanding plan loan is included in an in-plan Roth rollover, the balance of the loan is treated as a taxable amount.

401(k) and 403(b) plans have the following deadlines to be amended to allow 2010 in-plan Roth rollovers:

–for 401(k) plans, the later of the last day of the year in which the amendment is effective or December 31, 2011.

–for safe harbor 401(k) plans, 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.

-for 403(b) plans, the later of the plan’s remedial amendment period (described in Announcement 2009-89) or the last day of the first plan year in which the amendment is effective.

The 401(k) or 403(b) plan must be operated in accordance with the amendment, beginning on the amendment’s effective date. A 457(b) government plan may adopt an amendment to include a designated Roth account after December 31, 2010, and then allow in-plan Roth rollovers.

To allow an in-plan Roth rollover, a plan can be amended to allow an in-service distribution from the plan’s non-Roth accounts, with the entitlement to the distribution conditioned on the participant rolling it over to a designated Roth account in the same plan. However, the plan cannot impose this condition on any existing distribution options available under the plan.

An in-plan Roth rollover is not treated as a distribution for the following purposes: (1) transferring a plan loan to the designated Roth account without changing its repayment schedule; (2) requiring spousal consent; (3) requiring a participant’s consent before an immediate distribution of an accrued benefit of more than $5,000; and (4) eliminating a participant’s right to optional forms of benefit. If a plan offers in-plan Roth rollovers, it must include a description of this feature in the written explanation (the 402(f) Notice) the plan provides to participants who receive an ERD.

The IRS also provides guidance on: taxability and withholding (including that mandatory 20% withholding does not apply to an in-plan Roth rollover), reporting of 2010 in-plan Roth rollovers, and participant Form 8606 reporting. Also, to provide further guidance on in-plan Roth rollovers, the IRS has issued Notice 2010-84.