The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Ohio is representative of a question we commonly receive related to plan amendments. The advisor asked:
“I have a 401(k) plan sponsor client who allowed participants to complete in-plan Roth conversions for the first time in 2013, but failed to amend his plan document to allow for them. Does he have a compliance issue?”
Highlights of Discussion
• Normally, there would be a compliance issue with the plan because, in general, plan sponsors must adopt discretionary plan amendments no later than the last day of the plan year in which the amendment is first effective. Luckily, in this situation, the IRS has granted a special extension to the in-plan Roth conversion amendment deadline in IRS Notice 2013-74.
• Roth in-plan conversions have been around since Sept. 27, 2010, but 2013 was the first year during which 401(k) plan participants could covert non-Roth plan assets to designated Roth accounts within their plans without first having a distribution triggering event.
• In order to give plan sponsors sufficient time to adopt amendments to accommodate in-plan Roth conversions of otherwise nondistributable amounts for the 2013 plan year, the IRS is offering a special one-time extension to the amendment deadline to the later of either:
— The last day of the first plan year in which the amendment is effective; or
— Dec. 31, 2014, provided the amendment is effective as of the date the plan first operates in accordance with the amendment.
EXAMPLE: Hearts On Fire, Inc. has a calendar year 401(k) plan that began offering plan participants the ability to complete in-plan Roth conversions in 2013. The plan sponsor has until Dec. 31, 2014, to formally amend the plan document to incorporate the in-plan Roth conversion provisions. Without the special, one-time exception, the amendment deadline would have been Dec. 31, 2013.
• Sponsors of safe-harbor 401(k) plans — who usually are prohibited from making mid-year plan amendments — may also take advantage of the extended amendment deadline. Similarly, sponsors of safe harbor plans that permitted in-plan Roth conversions starting in 2013 or that will permit them in 2014, have until Dec. 31, 2014, to amend their plans. For the 2015 plan year, the amendment would have to be adopted in advance.
• The extension applies to provisions to: (1) accept in-plan Roth rollovers of otherwise nondistributable amounts; (2) add Roth elective deferral provisions; (3) permit a plan to accept Roth rollover contributions; and (4) permit a plan to accept in-plan rollovers of some or all of otherwise distributable amounts.
Conclusion
The IRS has granted 401(k) plan sponsors a one-time extension (through Dec. 31, 2014) to amend their plans to include in-plan Roth conversion provisions for 2013. Complete details are contained in IRS Notice 2013-74.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
