In December 2013, the IRS issued guidance under Notice 2013-74 (the “Notice”) regarding in-plan Roth rollover of amounts that are otherwise not distributable (“otherwise nondistributable amounts”) to participants as result of the terms of the plan document. The Notice provides guidance to plans wishing to add provisions allowing for this type of Roth rollover and the deadline to adopt the plan amendment.
An in-plan Roth rollover of an otherwise nondistributable amount means that a participant can roll pre-tax contributions into a designated Roth account even if there is no occurrence of a distributable event such as severance from employment. The following types of contributions qualify for the in-plan Roth rollover of otherwise nondistributable amounts: elective deferrals in 401(k) and 403(b) plans, matching contributions and nonelective contributions including qualified matching contributions and qualified nonelective contributions, and annual deferrals to governmental 457(b) plans. Under the Small Business Jobs Act of 2010 (“SBJA”), in-plan Roth rollovers were permitted only for eligible rollover amounts, meaning those amounts that were eligible for distribution due to the occurrence of a distributable event. However, the American Taxpayer Relief Act of 2012 (“ATRA”) expanded the SBJA by allowing in-plan Roth rollover of vested contributions in situations where there is no occurrence of a distributable event. To illustrate, a 30 year old participant who has not had a severance from employment, under the SBJA could not rollover his vested pre-tax account into a Roth account. Under the ATRA, this 30 year old can now rollover his vested contributions, including earnings into a designated Roth account in the same plan.
The rollover contribution will remain subject to distribution restrictions applicable to the amount before the in-plan Roth rollover. For instance, the in-plan Roth rollover amount and any future earnings cannot be distributed from the plan prior to the participant’s attainment of age 59½ or the occurrence of a distributable event. The rollover must be made pursuant to a direct rollover, therefore, no withholding is allowed from the amount. Because Roth contributions are subject to income tax withholding and the rollover amount cannot be used to pay the tax, a participant making the in-plan Roth rollover may need to increase his or her withholding from other sources of income or make estimated tax payments to avoid an underpayment penalty.
The Notice also provides the following deadlines for adopting plan amendments, including an extended deadline for plans that began allowing these in-plan Roth rollovers of otherwise nondistributable amounts in 2013:
Traditional 401(k) Plans. Generally, plans making discretionary amendments such as allowing for in-plan Roth rollover of otherwise nondistributable amounts are required to adopt a plan amendment by the end of the first plan year the amendment became effective. However, for 401(k) plans that began allowing in-plan Roth rollover of otherwise nondistributable amounts in plan year 2013, the IRS extended the deadline to adopt an amendment to the later of the last day of the plan year in which the amendment is effective or December 31, 2014. Thus, for a calendar-year plan that allowed in-plan Roth rollovers of otherwise nondistributable amounts in 2013, the sponsor has until December 31, 2014 to amend the plan document.
Safe-Harbor 401(k) Plans. Mid-year changes are permitted in safe-harbor 401(k) plans only for special circumstances. Mid-year changes are changes made after the beginning of the plan year that is effective during the plan year. The Notice provides a temporary period during which sponsors are permitted to make a mid-year adoption of in-plan Roth rollovers of otherwise nondistributable amounts. The temporary period ends on December 31, 2014. Consequently, for a calendar-year plan that allowed in-plan Roth rollover of an otherwise nondistributable amount in 2013 or 2014, the plan amendment providing for this option must be adopted by December 31, 2014.
403(b) Plans. For sponsors of 403(b) plans, the deadline to adopt an amendment permitting in-plan Roth rollover of otherwise nondistributable amounts is on or before the last day of the remedial amendment period or, if later, the last day of the first plan year in which the amendment is effective. The remedial amendment period is the time period during which 403(b) plans are required to restate their plan document. The IRS has not announced the last day of the remedial amendment period. Most practitioners believe the IRS will announce the end date in 2015 and this end date is expected to be more than a year after the date of that announcement.
Governmental 457(b) Plans. For sponsors of governmental 457(b) plans who began allowing in-plan Roth rollovers of otherwise nondistributable amounts in 2013 or 2014, the deadline to amend the terms of the plan document is the later of the last day of the first plan year in which the amendment is effective or December 31, 2014.
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