Now is the Time to Focus on In-Plan Roth Transfers
This e-bulletin updates and supplements our article, Expansion of the Availability of In-Plan Roth Transfers
, posted last year. As previously reported, the American Taxpayer Relief Act of 2012 (the ACT) provided the option for a plan to add a feature allowing members to designate existing pre-tax contributions in a retirement plan as Roth (i.e.,
after-tax) contributions ("in-plan Roth transfers"). This option would allow for such transfers, regardless of a member's eligibility for a distribution. Since that time, the Internal Revenue Service (IRS) provided answers to many questions about Roth transfers. Regardless as to whether a plan implemented in-plan Roth transfers or if such transfers were just considered, you may want to discuss details and take action, if in-plan Roth transfers are in your plan's future. If you already added these transfers, you may want to review the new guidance. These transfer provisions apply only to 403(b) plans, 401(k) plans and 457(b) plans.
In an effort to assist plans that are interested in providing in-plan Roth transfers to their members, in IRS Notice 2013-74
(Notice) issued December 11, 2013, the IRS extended the amendment deadlines to allow the plan documentation (via plan amendments) to be put in place, even after operationally in-plan Roth transfers became effective. This means that calendar year Internal Revenue Code (Code) Section 457(b) and 401(k) plans have until December 31, 2014, to amend and memorialize new plan provisions permitting in-plan Roth transfers in 2013 and 2014. The deadline for amending Code Section 403(b) plans was also extended to the later
of: (i) the date that is the last day of the plan's remedial amendment period or (ii) the last day of the first plan year the amendment is effective.
The Notice not only provided relief from amendment deadlines, but also answered many questions about the administration of in-plan Roth transfers. For example, the Notice permits plans to be more restrictive than the statute with respect to the type of contributions eligible for the in-plan Roth transfers. This will allow plan administrators to make choices with regard to the type of contributions eligible for Roth treatment (e.g.,
elective deferrals, matching and non-elective contributions, rollover contributions, etc
.) and the timing (e.g.
upon request, monthly, quarterly, annually, etc
.) that members must follow with respect to requesting an in-plan Roth transfer.
More Highlights of IRS Guidance
The Notice stated that previously issued Roth rollover distribution rules (i.e., Notice 2010-84
) are generally applicable (e.g.,
amounts transferred must be vested). However, there are two noteworthy exceptions for in-plan Roth transfers from IRS prior guidance. The first exception eliminated the requirement that the member be eligible for a plan distribution, so the transfer amount would not
need to be "distributable." (However, a plan may limit in-plan transfers to only amounts that are distributable.) The second exception eliminated the requirement to revise the special tax notice that accompanies plan distributions (often called the "402(f) safe harbor notice") as related to in-plan Roth transfers that are not distributable. These exceptions are logical based on the special rule created by the ACT for in-plan Roth transfers that provides individuals to "treat as a distribution . . . [an] amount not otherwise distributable under the plan."
An open question that the Notice did not address concerns the plan's ability to allow a transfer of funds to a Roth account by individuals that are not plan members; therefore, if policymakers wish to extend the transfer option beyond members, potential compliance concerns should be addressed.
In-Plan Roth Transfer Feature – To-Do List for 2014
If the plan has already been amended to provide for in-plan Roth transfers, review the plan language for compliance with Notice 2013-74.
If the plan has not been amended to provide for in-plan Roth transfers, decide whether the plan is interested in making in-plan Roth transfers available to members. As part of this decision making --
Confer with the plan's internal administrative team and/or third party vendor to see if there are limitations or unexpected costs associated with providing in-plan Roth transfers.
Draft plan language, including (1) limitations on contribution types, if any, (2) frequency limitations of transfers (e.g., how often can members make transfers – monthly, quarterly, etc.), (3) clarification that transfers only apply to vested amounts, and (4) provisions describing who can make transfers.
Prepare (or review if a vendor prepares) administrative forms needed to implement the in-plan Roth transfer.
Again, because of the timetables provided in Notice 2013-74, we recommend that, if policymakers believe that the in-plan Roth transfers are plan features that should be considered for the plan as an option for members, the planning and drafting associated with the transfers should commence soon. We also recommend that, if the plan already has adopted in-plan Roth transfers, a review of the plan language should also be accomplished during 2014.
If you have any questions or would like additional information about in-plan Roth transfers and how it impacts your retirement plan, please contact Mary Beth Braitman, Robert Gauss, Lisa Erb Harrison, Tiffany Sharpley or any member of Ice Miller's Employee Benefits Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
Inventory and update member communication materials.
If needed, draft (or review the draft if prepared by vendor) new communication pieces to be sure the new feature as well as the related administrative process are clearly described.