Last week, the IRS released Notice 2013-74, which provides guidance on in-plan Roth rollovers of amounts that are not otherwise distributable. This email summarizes the requirements for these rollovers, which may be made in 401(k), 403(b) and governmental 457(b) plans.
As background, the Small Business Jobs Act of 2010 amended the Tax Code to allow a plan that permits Roth deferrals to allow employees to roll over amounts from other accounts to their designated Roth accounts in the plan as long as those amounts are otherwise eligible for distribution from the plan as eligible rollover distributions. For example, amounts available for distribution at age 59½ are eligible for distribution as eligible rollover distributions, but hardship distributions are not eligible for rollover. Click here to read the 10/1/10 EmployNews article Employee Benefits Affected by Small Business Jobs Act of 2010. The IRS previously published Notice 2010-84 to provide guidance on these in-plan Roth rollovers.
Subsequently, the American Taxpayer Relief Act of 2012 amended the Code to expand the amounts eligible for in-plan Roth rollover. Now, a plan that permits Roth deferrals may be amended to allow employees to roll over amounts from other accounts that are vested but are not otherwise eligible for distribution. The guidance in Notice 2010-84 generally applies to all in-plan Roth rollovers, but under Notice 2013-74, rollovers of amounts not otherwise eligible for distribution are subject to the following additional requirements:
- In order to be eligible for an in-plan Roth rollover, the amounts not otherwise eligible for distribution must be vested.
- An in-plan rollover of amounts that are not eligible for distribution must be a direct rollover, and therefore no special tax notice (§402(f) notice) is required
- Amounts rolled over remain subject to the same distribution restrictions that applied before the in-plan Roth rollover. For example, amounts rolled over from a participant’s elective deferral account before age 59½ may not be distributed from the plan before the participant reaches age 59½ or otherwise has a distributable event (for example, termination of employment). Therefore, these amounts may need to be accounted for separately from other Roth deferrals.
- Because the rollover is a direct rollover and the amount is not otherwise distributable from the plan, there is no required withholding and no amount may be withheld for voluntary withholding. Therefore, an employee who makes an in-plan Roth rollover may need to increase his or her withholding or make estimated tax payments in order to avoid an underpayment penalty
In order for in-plan Roth rollovers of amounts not otherwise eligible for distribution to be made, a plan must permit Roth deferrals, must provide for the acceptance of rollover contributions to Roth accounts, and must permit in-plan Roth rollovers. Although discretionary amendments usually must be made by the end of the applicable plan year, Notice 2013-84 generally permits a plan to allow in-plan Roth rollovers during 2013 as long as the employer amends the plan retroactively to provide for such rollovers by not later than December 31, 2014.
Therefore, under Notice 2013-84, a plan could be administered to allow in-plan Roth rollovers during the remainder of 2013 as long as this option is promptly communicated to all participants and as long as the plan’s third-party administrator is able to administer this provision during this time. Adoption of an amendment for this purpose could be delayed until sometime during 2014. Early reports from third-party administrators indicate that they may not be able to administer this option until sometime during 2014 because the IRS guidance was provided so late during 2013, but employers that would like to implement in-plan Roth rollovers may want to discuss this possibility with their third-party administrators as soon as possible.