Proposed Regulations Breathe Life Into the Roth 401(k) Plan
- With Roth 403(b) Coming Next -
When first proposed in the House Republican’s Contract with
The Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA) permitted Roth contributions to be made to a traditional 401(k)
or 403(b) plan, but not until
Roth contributions are treated like pre-tax elective contributions in many ways, for example:
• Roth contributions are subject to the overall limitation on elective contributions ($15,000 for 2006). This limitation applies to the total elective contributions, both Roth and pre-tax, that a participant can make to a plan in any calendar year. However, this compares favorably to the maximum contribution that may be made to a Roth IRA (4,000 in 2006).
It remains to be seen who will be most interested in making Roth contributions to 401(k) or 403(b) plans and in what numbers. It is anticipated that Roth contributions will be attractive to individuals who cannot currently contribute to Roth IRAs due to the AGI eligibility restrictions. Also, any individuals who expect their tax rate to be higher in the future (at the time of their retirement distribution) may be interested in Roth contributions. Some individuals might also view Roth contributions to their 401(k) or 403(b) plans as a desirable mechanism for potentially providing tax-free pre-retirement death benefits to their beneficiaries. However, not everyone is a proponent of Roth contributions. Reps. Ben Cardin, D-Md, and Rob Portman, R-Ohio, introduced pension legislation on April 29, 2005 that would eliminate Roth 401(k) plans, citing them as another plan in an already "swamped market" that will "lose significant amounts of revenue over time."
Whether employers will rush in large numbers to amend their plans to permit Roth contributions is yet to be seen. Some may be reluctant because, like most EGTRRA provisions, those relating to Roth contributions to 401(k) and 403(b) plans “sunset” or expire after 2010. Furthermore, adding the ability to make Roth contributions will probably require some cost and effort, including additional recordkeeping, communication materials and participant education, plan amendments, summary plan description modifications, and new enrollment, distribution, and other administrative forms.
Nevertheless, in a formal survey at a recent seminar we sponsored, over one-third (1/3) of the audience indicated they were going to implement Roth contributions and one-half (1/2) were considering Roth contributions. Financial institutions, third-party administrators, and other vendors to 401(k) and 403(b) plans will quickly develop products and services that will simplify the tasks and reduce the costs associated with maintaining Roth accounts. Therefore, if you have not already given Roth contributions some thought, you will want to put this on your list of things to consider for 2006.
For additional information about the proposed regulations and how they may impact your business, please call or e-mail your contact in the Employee Benefits Group at Ice Miller.