The Small Business Jobs Act of 2010, which was signed into law by President Obama September 27, 2010, permits "applicable retirement plans" with designated Roth accounts to accept rollovers of otherwise distributable amounts from within the plan. This is often referred to as an in-plan Roth conversion. This provision is effective immediately and eliminates the need for employees and spousal beneficiaries to roll non-Roth money out of their retirement plan into a Roth IRA in order to take advantage of a Roth program. An "applicable retirement plan" is a 401(k) plan, a 403(b) plan, and, beginning January 1, 2011, a governmental 457(b) plan.
The in-plan Roth conversion may be attractive to plan participants because of the special tax rule for 2010, which allows a participant who rolls over tax deferred amounts into a Roth account in the plan to include one-half of the distribution amount in gross income in 2011 and include the remainder in 2012.
The ability to perform an in-plan Roth rollover is not without restriction, however, because an in-plan Roth conversion is considered a distribution for tax purposes. It applies only to amounts that would otherwise be distributable under the terms of the plan, such as in-service distributions for elective deferrals of a participant who is at least age 59-1/2. If the plan does not otherwise provide for in-service distributions, then in order to take advantage of the conversion opportunity, it must be amended to permit such distributions. The amendment can be tailored so that the expanded distribution options only apply to participants who elect an in-plan Roth conversion.
In addition, the new law provides that non-Roth amounts can only be rolled over into standard Roth designated accounts in the plan, which are accounts that hold Roth contributions made by employees. An employer could amend its plan to establish a new Roth contribution program in a plan that does not currently include one, but it must allow employees to make Roth contributions and to accept rollovers. A Roth designated account cannot be limited to receiving rollovers. If you would like to add a Roth contribution program to your plan this year, your plan must be amended by December 31, 2010.
Plans with existing designated Roth accounts can begin accepting in-plan rollovers in good-faith compliance with the new law and amend their plans later (so as to allow participants to take advantage of the special tax rule for 2010), as long as the amendment contains the retroactive effective date and the administration has been consistent with the terms of the amendment.
Sponsors of governmental Roth 457(b) plans will be able to add a Roth contribution program to their plans beginning in 2011. Participants in governmental 457(b) plans will be able to take advantage of the special tax rule for 2010 only by rolling over distributions into a Roth IRA.