SunGard Relius

Beginning January 1, 2008, a plan participant may roll over directly from an “eligible retirement plan” account to a Roth IRA, subject to the existing limitation on Roth IRA rollovers. An eligible retirement plan includes a qualified plan, a 403(b) plan, and a governmental 457(b) plan. This law change was part of the Pension Protection Act of 2006 (“PPA”).

Pre-2008 Rules. Prior to PPA, a participant receiving a distribution other than from a Roth (401(k) or 403(b)) plan account (i.e., pre-tax account and after-tax employee contributions), who wished to transfer the distribution to a Roth IRA, had to roll over the distribution to a “traditional” IRA, and then convert the traditional IRA to a Roth IRA. The participant had to include in gross income the taxable portion of the amount converted from the traditional IRA to the Roth IRA, but the conversion was not subject to the Code §72(t) premature distribution penalty. In addition, an individual only could convert from a traditional IRA to a Roth IRA if the individual’s adjusted gross income (“AGI”) did not exceed $100,000 for the taxable year in which the conversion occurred. Thus, the law required a two-step process to complete the conversion from a pre-tax plan account to a Roth IRA: pre-tax distribution and rollover (or direct rollover) to traditional IRA, then conversion from traditional IRA to Roth IRA.

New Post-2007 Rules. After the PPA law change which is now in effect, a participant may elect to roll over a distribution from an eligible retirement plan to a Roth IRA, without the intervening step of rolling over the distribution to a traditional IRA. The tax consequences of the conversion are the same as for pre-2008 distributions: the individual must include in gross income the taxable portion of the conversion amount, and the conversion is not subject to the premature distribution penalty tax. Therefore, the conversion process to Roth IRA is simpler. However, the AGI limitation on who can convert a non-Roth account to a Roth IRA still applies. (Note that Congress has eliminated the AGI limitation on Roth IRA conversions for post-2009 distributions.)

Importance to Plan Administrators. Although employers may consider the law change described above a fairly minor one, the law change impacts qualified plan administrators making distributions from a non-Roth account. Specifically, the plan administrator has the legal obligation to give written notice of the direct rollover option to any participant receiving an eligible rollover distribution (the “402(f) notice”). The non-Roth plan to Roth IRA option is an additional option now available to participants who satisfy the AGI limitation. Therefore, employers should modify their 402(f) notice to reflect the new rules.

The Pension Library. SunGard has updated the 402(f) notices in the ERISA Forms component of the Pension Library to include the non-Roth plan to Roth IRA option. The IRS has not updated its model 402(f) notice for the non-Roth plan to Roth IRA law change. In addition, the Service has not yet updated its model 402(f) notice to take into account distributions from Roth 401(k) plans or other expanded rollover options (such as rollover of after-tax contributions to a 403(b) plan). Nor has the IRS issued a model notice for a nonspouse beneficiary entitled to roll over a death distribution. The Library includes all of these updated notices, as well as many other new forms that law changes, including PPA, necessitate. For more information about The Pension Library, call our Sales Department, 800-326-7235, Ext. 1100.

Current Relius® Documents ASP and PC system, and Pension Library subscribers receive the updated forms at no cost. These clients have been contacted by a separate e-mail or letter. If this applies to you and you have not receive the information within the next week, please contact our Client Account Services department, 800-326-7235, Option 6.

The 402(f) notice will also be discussed in the 401(k) Plan Workshops held in several cities during April and May. More information about the Workshops will be available on our Web site in mid-February.