New Roth In-Plan Rollover Guidance

April 2, 2014

The IRS has provided new guidance on rollovers within a retirement plan to designated Roth accounts in the same plan – in-plan Roth rollovers.

For a Roth IRA, all contributions are after tax. No deduction is allowed. But amounts held in a Roth IRA that are withdrawn as a qualified distribution are not includable in income or subject to the 10-percent early withdrawal tax.

A qualified distribution is a distribution that is made:

• After the five-tax-year period beginning with the first tax year for which the individual made a contribution to a Roth IRA, and
• After attainment of age 59 1/2 on account of death or disability or for first-time homebuyer expenses of up to $10,000.

Distributions from a Roth IRA that are not qualified distributions are includable in income to the extent attributable to earnings. They may also be subject to the 10-percent early withdrawal tax.

The 2012 Taxpayer Relief Act allows certain retirement plans to permit participants to elect in-plan Roth rollovers. The new Notice 2013-74 generally expands rules originally published in Notice 2010-84 to apply to all in-plan Roth rollovers, with some modifications.

For example, to be eligible for an in-plan Roth rollover, an amount must be vested. However, the rule that provides that an amount is not eligible for an in-plan Roth rollover unless it satisfies the rules for distribution under the tax code no longer applies.

The new notice provides that the following contributions and related earnings may now be rolled over to a designated Roth account in the same plan without regard to whether the amounts satisfy the conditions for distribution:

• Elective deferrals in 401(k) and 403(b) plans
• Matching contributions and nonelective contributions
• Annual deferrals made to governmental 457(b) plans

No withholding applies to an in-plan Roth rollover of an otherwise nondistributable amount. Further, no part of the rollover may be withheld for voluntary withholding. But an employee making an in-plan Roth rollover may need to increase his withholding or make estimated tax payments to avoid an underpayment penalty.

A plan amendment that provides for in-plan Roth rollovers of otherwise nondistributable amounts is a discretionary amendment. It 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 adopt such an amendment and enable plan participants to make in-plan Roth rollovers of otherwise nondistributable amounts before the end of the 2013 plan year, the IRS is extending the deadline. Provided the amendment is effective as of the date the plan first operates in accordance with the amendment, the deadline is now the later of either:

• The last day of the first plan year in which the amendment is effective, or
• Dec. 31, 2014.