• New In-Plan Roth Rollover Rules Benefit Retirement Plan Participants
  • January 8, 2014
  • Law Firm: Kaufman Canoles A Professional Corporation - Norfolk Office
  • A newly released IRS Notice regarding in-plan rollovers to Roth accounts provides advantageous planning opportunities for qualified retirement plan sponsors and participants. Before 2010, retirement plan participants had no way of converting their existing non-Roth retirement-plan balances to Roth accounts within the same plan. A revision to the law in 2010 attempted to bridge this gap, but fell short of full relief by only allowing in-plan Roth rollovers for amounts that were otherwise distributable under the plan’s terms. That usually meant a participant could not roll over non-Roth balances to a Roth account unless they were 59 and the plan allowed in-service distributions. As a result, the 2010 legislation provided little practical relief for participants who could otherwise take advantage of in-plan Roth rollovers but did not meet the plan’s distribution requirements. Congress addressed this shortcoming in 2012 by expanding the availability of in-plan Roth rollovers to include amounts that aren’t otherwise eligible for distribution.

    The new IRS Notice 2013-74 provides welcome guidance for participants and plan sponsors. It confirms that in-plan Roth rollovers may now include elective deferrals, employer matching contributions, and employer nonelective contributions that may not otherwise be distributed from the plan—although in-plan Roth rollovers still are limited to vested account balances. With this new opportunity also comes a potential pitfall: A large in-plan Roth rollover will result in a corresponding tax liability, and the IRS guidance confirms that income tax withholding is not permitted in these transactions. As a result, participants will have to plan carefully to ensure they can meet their tax obligations after triggering income taxes on their entire in-plan Roth rollover. On the employer’s end, plan sponsors must adopt a plan amendment to include the full scope of in-plan rollover options now available. But because the guidance came so late in the year, the IRS also extended the deadline for plan sponsors to adopt such an amendment until December 31, 2014, even if the plan begins offering expanded in-plan Roth rollovers before the end of 2013. Employers may, therefore, begin offering in-plan Roth rollovers of otherwise nondistributable amounts before the end of this year without amending their plan. (Recall that these broadened in-plan Roth rollovers—and all in-plan Roth rollovers—are only permissible plan features, and are not required.)

    Our experienced attorneys stand ready to assist participants or plan sponsors who may benefit from in-plan Roth rollovers.