On December 11, 2013, the Internal Revenue Service issued Notice 2013-74, which provides additional guidance for 401(k), 403(b) and governmental 457(b) plan sponsors on permitting in-plan Roth conversions (called “rollovers”) of pre-tax amounts.
Prior to 2013, in-plan Roth rollovers were only permitted for amounts that were otherwise distributable. However, beginning in 2013, plans may now offer in-plan Roth rollovers regardless of whether amounts are distributable. Notice 2013-74 provides that all vested assets in a participant’s plan account, including pre-tax elective deferrals, matching contributions and non-elective employer contributions, may be rolled over to a Roth account. Thus, non-vested amounts cannot be included. The Notice also requires that any rolled over amounts must continue to be subject to the same distribution restrictions as before the rollover.
Plan sponsors may limit the types of contributions eligible for in-plan Roth rollovers and specify the frequency with which rollovers can be made, subject to the applicable non-discrimination requirements. In addition, in-plan Roth rollovers are not “protected benefits” and, therefore, plan sponsors can discontinue or limit such rollovers at a later time, as long as they comply with applicable non-discrimination rules.
In general, employers have until the last day of the plan year in which an in-plan Roth rollover is first permitted to amend their retirement plans to add the broader in-plan Roth rollover option. However, for the 2013 plan year, 401(k) plan sponsors have until December 31, 2014 to amend their plans to add expanded in-plan Roth rollovers or make other Roth-related amendments – including allowing Roth elective deferrals or Roth rollovers from other plans. The extended deadline also applies to 401(k) safe harbor plans, which can be amended mid-year in either 2013 or 2014 to add such a feature so long as the amendment is adopted by December 31, 2014.
The new IRS guidance also addresses tax issues for participants relating to in-plan Roth rollovers. In particular, amounts rolled over are not subject to mandatory tax withholding (and cannot be subject to voluntary withholding). As a result, participants making in-plan Roth rollovers may need to adjust their other income tax withholdings or make estimated tax payments to avoid an underpayment penalty. In addition, if the in-plan Roth rollover is the first contribution by a participant to a Roth account, the five-year holding requirement will apply from the first day of the taxable year in which the rollover is made.
Lastly, while not directly addressed in the Notice, any in-plan Roth rollover of a non-distributable amount will have to be reported as a taxable distribution on Form 1099-R for Federal income tax purposes (as is currently the case for in-plan Roth rollovers of distributable amounts).