FIS Relius
In-plan Roth Transfers: Implementation FAQs 2/4/2013
Email This Link
In-plan Roth Transfers: Implementation FAQs

At beginning of the year, the President signed the American Taxpayer Relief Act of 2012 which includes an in-plan Roth transfer provision. The new provision is similar to the in-plan Roth rollover except the provision applies to amounts which are not distributable. The in-plan Roth transfer likely will be a little less complicated to apply, and therefore probably more popular. The in-plan Roth transfer also has generated more interest because of the increased tax rates for certain taxpayers.

The IRS is working on guidance for the new provision but because it is immediately effective, practitioners are being asked questions by clients. Accordingly, we have assembled a number of the frequently asked questions in this technical update and have provided responses. Of course, some issues will need to await guidance from the IRS and the IRS may announce interpretations that differ from the ones in this update.

Q-1: What is an in-plan Roth transfer?

An in-plan Roth rollover is a conversion of an amount from a non-Roth account in a 401(k), 403(b) or 457(b) plan to a Roth account in the same plan.

Q-2: What amounts are eligible for an in-plan Roth transfer?

A participant may transfer amounts to a Roth account not otherwise distributable under the plan. If amounts are eligible for distribution, the plan may permit a participant to convert the amounts to Roth through an in-plan Roth rollover, under the rules which have been in effect since 2010. The new provision does not limit the transfer to vested amounts but presumably plans will restrict the transfers to vested accounts. Note: The IRS will need to further define the term “distributable" in future guidance.

Q-3: Must the plan have a Roth deferral feature in order for a participant to make an in-plan Roth transfer?

Yes. We expect the IRS guidance to require, as it did with the in-plan Roth rollover, to require the plan to have the Roth deferral program “in place." The Roth program “is in place on a given date only if, with respect to compensation that could be deferred beginning with that date, eligible employees are given an opportunity to elect on that date to have designated Roth contributions made to the plan (or would have such an opportunity but for a statutory or plan limitation on the amount of an employee’s elective deferrals)." Giving the employees an opportunity to elect Roth deferrals would seem to require that the employer give the employees a deferral election form whereby a participant can elect to make Roth deferrals.

Q-4: Will a plan need to be amended to take advantage of the new in-plan Roth transfer option? If so, what is the deadline for the amendment?

Yes. Since the provision is a discretionary amendment to the plan, the employer has until the end of the plan year in which the employer wants to put the provision into effect. For example, if an employer with a calendar plan year wants to implement the provision for 2013, the employer must amend the plan by December 31, 2013. Note: The IRS, in guidance, may provide for a later date than the last day of the plan year. They did provide an extended deadline for in-plan Roth rollovers and we anticipate that they will do so for in-plan Roth transfers.

The extension does not apply to a plan amendment to add a 401(k) feature to the plan. In other words, in order to permit in-plan Roth rollover contributions, an employer must have an existing 401(k) plan in place prior to permitting any in-plan Roth transfers.

Q-5: Must the employer adopt the amendment before the participants can take advantage of the provision?

No. The plan may permit the participants to make the transfer election prior to the adoption of the amendment as long as the employer adopts the amendment by the end of the plan year, or whatever later deadline the IRS allows. However, as discussed in Q-3, the Roth deferral program probably will need to be in place before a participant can make an in-plan Roth transfer.

Q-6: Will the plan need to provide a summary of material modifications regarding the amendment?

Yes.

Q-7: Will the IRS provide a model amendment?

Probably not. Note: SunGard will provide an amendment shortly after the IRS releases guidance regarding the new provision.

Q-8: Will a safe harbor 401(k) plan (either “traditional" or “QACA") be able to add the in-plan transfer mid-year?

We expect the IRS, in its upcoming guidance, will permit the addition of the in-plan transfer mid-year as it did with the in-plan Roth rollover. We also don’t think the IRS will require the plan to provide a mid-year safe harbor notice. This mid-year amendment capability will likely be available for a limited time. For example, the IRS may permit mid-year addition of in-plan Roth transfers so long as the employer adopts the amendment no later than December 31, 2013. Thereafter, the employer would not be able to add the feature to the safe harbor plan in the middle of a plan year.

Q-9: What types of plans other than 401(k) plans can provide for an in-plan Roth transfer?

403(b) and governmental 457(b) plans.

The IRS (in Announcement 2009-89) previously stated that if an employer adopted a written 403(b) plan document intended to satisfy the 403(b) requirements, including the final regulations, by December 31, 2009 (or, if later the date the plan is established), the employer will have a remedial amendment period during which to correct any form defects retroactive to January 1, 2010, provided the employer subsequently adopts a pre-approved plan or applies for a determination letter under forthcoming IRS procedures. The remedial amendment period will permit the employer to correct any defects retroactive to January 1, 2010 (or the date the plan is established). For a 403(b) plan entitled to the remedial amendment period described in this Q&A, the employer need not adopt an amendment providing for in-plan Roth transfers before the later of the end of that remedial amendment period or the last day of the first plan year in which the amendment is effective, provided the amendment is retroactively effective as of the date the plan first operates in accordance with the amendment. Of course, an employer may adopt such an amendment.

SunGard is providing several opportunities to learn about the new in-plan Roth transfer provision.

In-Plan Roth Transfers: The New Wrinkle – In January 2013, Congress added in-plan Roth transfers. This Web seminar explains all the Roth rules as we now understand them, and puts the new transfer option into perspective. Register online here: www.relius.net/Events/events.aspx?Web.

To Roth or Not to Roth 2013 This Web seminar analyzes the strengths, weaknesses, and tactics of Roth rollovers and conversions, and the effect they have on qualified plans. The speaker gives you the tools, so you can know the strategies available and help others to decide on the best choice for them. Register online here: www.relius.net/Events/events.aspx?Web.

Form 5500 Workshop 2013, April – June
One of the primary purposes of EFAST2 was to make IRS and DOL enforcement more timely and effective. Every indication suggests that the government is following through on its promise. If you have wondered why the IRS or DOL is auditing or investigating your clients’ plans, you probably need look no further than the answers and information included on the Form 5500. EFAST2 now allows the IRS and DOL to “target more accurately and effectively those plan filings we want to go after." In addition to helping you understand the Form 5500 enforcement issues, we will address those troublesome 5500 filing issues and explain how to resolve those frustrating and time-wasting errors. Visit our Web site for details and to register online - www.relius.net/events/events.aspx?Seminar.

401(k) Plan Workshop 2013, April – June
This year’s 401(k) Plan Workshop will discuss the likely changes Tax Reform will have on retirement plans. Using examples and case studies, we also will describe the changes in IRS’s plan correction program (EPCRS) and how to utilize the program to effect plan corrections. Other topics include: in-plan Roth transfers; retroactive amendments (11(g) amendments) to avoid plan disqualification; tax consequences of plan disqualification; identifying, testing amending benefits, rights and features, current developments; and an interesting explanation of what the IRS likely will do with the information they obtained in their recent surveys of 401(k) plans. Visit our Web site for details and to register online - www.relius.net/events/events.aspx?Seminar.