On April 27, 2007, the Internal Revenue Service released final regulations providing guidance concerning the taxation of distributions from designated Roth accounts in 401(k) plans. These regulations are generally applicable to taxable years beginning on or after Jan. 1, 2007. The final regulations largely retain the provisions of the 2006 proposed regulations, and also clarify several aspects of the proposed regulations, including provisions: 

  • Confirming that an amount may still be a Roth “qualified distribution” even though it is not an eligible rollover distribution, such as in the case of a hardship distribution 
  • Explaining how the participation periods must be calculated for purposes of satisfying the fivetaxable- year period for distributions from Roth 401(k) accounts to be Roth “qualified distributions,” including provisions indicating that certain recharacterized contributions, such as those resulting from excess deferrals, do not start the five-taxable-year period of participation While the 2006 proposed regulations included guidance regarding designated Roth contributions under Section 403(b) plans, the final regulations do not address these issues. Rather, the Internal Revenue Service has indicated that this guidance will be included in the final regulations under Code Section 403(b), which are expected to be forthcoming later this year.

These final regulations offer plan sponsors welcome guidance on administrative and taxation issues common in Roth 401(k) plans. Following on the heels of Congress’ decision last year, with the passage of the Pension Protection Act, to make permanent the availability of the Roth 401(k) and 403(b) plans, these regulations, along with the Internal Revenue Service’s prior regulations and guidance, may serve to enhance the attractiveness of Roth plans by adding clarity to the operation of such plans.

If you have any questions about the new Roth 401(k) regulations, or if you are considering amending your 401(k) plan to offer a Roth feature, please contact one of the members of Reed Smith's employee benefits team listed below, or the Reed Smith attorney with whom you regularly work.