Conducting in-plan Roth rollovers may be smoother thanks to IRS guidance issued Dec. 11. Under IRS Notice 2013-74, these contributions and earnings on them can be rolled over into a designated Roth account in the same plan:
• elective deferrals in 401(k)s and 403(b)s
• matching contributions
• nonelective contributions
• annual deferrals made to 457(b) plans
Amounts rolled over to designated Roth account are subject to the distribution restrictions applicable to those amounts before the rollover. For example, if a 401(k) plan participant makes an in-plan Roth rollover of an amount from his or her pre-tax elective deferral account before age 59-1/2, the amount and applicable earnings may not be distributed before that age or before: (1) plan termination; (2) sale of an employer’s assets to another company; or (3) sale of an employer’s interest in a subsidiary.
The notice touches on a variety of other issues:
• Withholding. In-plan Roth rollovers of amounts that would otherwise not be distributable are eligible rollover distributions, so there is no withholding.
• Contributions. A plan may restrict the type of contributions eligible for an in-plan Roth rollover and the frequency of in-plan Roth rollovers, as long as it meets the nondiscrimination requirements normally applicable to plan benefits, rights, and features, such as the right to make a rollover.
• Qualified distributions. If an in-plan Roth rollover is the first contribution made to an employee’s designated Roth account, the five-taxable-year period of participation required for a qualified distribution begins on the first day of the first taxable year in which the employee makes the in-plan Roth rollover.
• Net unrealized appreciation. An in-plan Roth rollover is treated as a distribution for purposes of determining eligibility for the special tax rules on net unrealized appreciation in employer securities paid as a lump sum distribution.
• Amendment period. A calendar-year 401(k) may permit an in-plan Roth rollover of an otherwise nondistributable amount during 2013 if it amends its plan by Dec. 31, 2014; a 401(k) safe harbor plan also must adopt an amendment by that date.
• 403(b) plans. Employers that adopted a 403(b) plan on or before Dec. 31, 2009 (or, if later, the date the plan is established) have a remedial amendment period in which to amend the plan to correct any form defects retroactive to Jan. 1, 2010 (or the date the plan is established). The IRS has not yet announced the end date of this remedial amendment period.
• 457 plans. A 457(b) plan must reflect any optional provisions to ensure that the plan is operated in accordance with its plan terms. Such a plan must adopt an amendment to permitting in-plan Roth rollovers of otherwise nondistributable amounts during 2013 or 2014 by: (1) the later of the last day of the first plan year in which the amendment is effective; or (2) Dec. 31, 2014, provided the amendment is effective as of the date the plan first operates in accordance with the amendment.
Notice 2013-74 will be published in the Internal Revenue Bulletin of Dec. 23. Additional information is available by sending an email to [email protected].
John Iekel is a writer/editor for ASPPA and its sister organizations, including NAPA Net.
