IRS Releases Guidance on In-plan Rollovers to Designated Roth Accounts in Retirement Plans | Practical Law

IRS Releases Guidance on In-plan Rollovers to Designated Roth Accounts in Retirement Plans | Practical Law

In Notice 2013-74, the Internal Revenue Service (IRS) provides guidance on rollovers within a retirement plan to designated Roth accounts in the same plan. The Notice discusses an extended amendment deadline for in-plan Roth rollovers of otherwise nondistributable amounts.

IRS Releases Guidance on In-plan Rollovers to Designated Roth Accounts in Retirement Plans

by Practical Law Employee Benefits & Executive Compensation
Published on 13 Dec 2013 • USA (National/Federal)
In Notice 2013-74, the Internal Revenue Service (IRS) provides guidance on rollovers within a retirement plan to designated Roth accounts in the same plan. The Notice discusses an extended amendment deadline for in-plan Roth rollovers of otherwise nondistributable amounts.

IRS Notice 2013-74

On December 12, 2013, the IRS released Notice 2013-74 (Notice), which provides guidance on rollovers within a retirement plan to designated Roth accounts in the same plan (in-plan Roth rollovers) (IRS Notice 2013-74, (Dec. 12, 2013)).
Section 2112 of the Small Business Jobs Act of 2010 (SBJA) added Internal Revenue Code (IRC) Section 402A(c)(4), which provides that retirement plans, including 401(k) plans, that include a qualified Roth contribution program can allow employees to roll over amounts from their non-Roth accounts to their designated Roth accounts in the same plan.
Prior to 2013, to be eligible for an in-plan Roth rollover contribution, the amount must have been eligible for distribution to the participant under the terms of the plan and the IRC. However, effective January 1, 2013, the American Taxpayer Relief Act of 2012 (ATRA) changed this requirement and does not require a distributable event to occur for the participant to make in-plan Roth rollover contributions.
IRS Notice 2010-84 provided guidance on in-plan Roth rollovers (IRS Notice 2010-84, (Nov. 30, 2012)). The guidance provided in Notice 2013-74 is in addition to the guidance provided in Notice 2012-84.

Effect of Notice 2010-84 to In-plan Roth Rollovers

The Notice provides that the rules in Notice 2010-84 apply to all in-plan Roth rollovers, including that:
  • The rules under Notice 2010-84 apply to otherwise nondistributable amounts, such as the vesting requirements (for example, to be eligible for an in-plan Roth rollover, an amount must be vested).
  • An IRC Section 402(f) notice or special tax notice is not required for a participant making an in-plan Roth rollover of an otherwise nondistributable amount.

Rules Applicable to In-plan Roth Rollovers of Otherwise Nondistributable Amounts

The Notice provides additional guidance on in-plan Roth rollovers of otherwise nondistributable amounts, including that:
  • The following contributions (and earnings thereon) may be rolled over to designated Roth accounts without regard to whether they satisfy the conditions for distribution:
    • elective deferrals in 401(k) and 403(b) plans;
    • matching contributions and nonelective contributions, including qualified matching contributions and qualified nonelective contributions described in 26 CFR § 1.401(k)-6; and
    • annual deferrals made to governmental 457(b) plans.
  • If an amount is rolled over to a designated Roth account, the amount and the earnings thereon remain subject to the distribution restrictions that were applicable to the account before the in-plan Roth rollover.
  • An in-plan Roth rollover of an otherwise nondistributable amount is treated as an eligible rollover distribution for purposes of IRC Section 3405 and no withholding under IRC Section 3405 applies.
  • A plan amendment that provides for in-plan Roth rollovers of otherwise nondistributable amounts is due the later of:
    • the last day of the first plan year in which the amendment is effective; or
    • December 31, 2014, provided the amendment is effective as of the date the plan first operates in accordance with the amendment.
    For a 401(k) plan that has a calendar-year plan year to permit an in-plan Roth rollover of an otherwise nondistributable amount during 2013, it must adopt a plan amendment providing for that option no later than December 31, 2014.
  • The extended amendment deadline also applies to plan amendments that:
    • permit elective deferrals under a plan to be designated as Roth contributions;
    • provide for the acceptance of rollover contributions by designated Roth accounts; and
    • permit in-plan Roth rollovers of some or all otherwise distributable amounts.
  • Sponsors of 401(k) safe harbor plans are permitted to make a mid-year change to provide for in-plan Roth rollovers of otherwise nondistributable amounts. For example, if a 401(k) safe harbor plan with a calendar year plan year permits in-plan Roth rollovers of otherwise nondistributable amounts during 2013 or 2014, the plan must adopt a plan amendment providing for that option by December 31, 2014.

Rules Applicable to All In-plan Roth Rollovers

The Notice clarifies certain rules applicable to all in-plan Roth rollovers, including that:
  • A plan may limit:
    • the type of contributions eligible for an in-plan Roth rollover; and
    • the frequency of in-plan Roth rollovers.
    For example, a plan could provide that only otherwise distributable amounts are eligible for in-plan Roth rollovers. If the plan has this type of restriction, it would not need to separately account for different types of in-plan Roth rollover amounts.
  • A plan with an ongoing qualified Roth contribution program would not violate the prohibited transaction rules of IRC Section 411(d)(6) if it discontinued in-plan Roth rollovers, because an employee's ability to make an in-plan Roth rollover is not a protected benefit under IRC Section 411(d)(6). But a plan amendment to eliminate in-plan Roth rollovers cannot be timed so as to discriminate in favor of highly compensated employees or former highly compensated employees.

Practical Implications

Employee benefit plan sponsors, administrators and attorneys should be aware of this anticipated guidance as well as the extended amendment deadline. For more information relating to Roth 401(k) plans and in-plan Roth rollovers, see Practice Note, Roth 401(k) Plans and Standard Clause, Plan Language, In-plan Roth Rollover Contributions for 401(k) Plans which will be updated for the Notice.