For several years, 401(k), 403(b), and governmental 457(b) plans have been allowed to permit participants to convert distributable pre-tax funds to a Roth account within the same plan ("in-plan Roth rollovers"). Late last year the IRS published Notice 2013-747 (the "Notice") which expanded the availability of in-plan Roth rollovers to nondistributable pre-tax funds and answered several questions related to in-plan Roth rollovers. The following is a brief overview of some of the key questions answered by the Notice:
- In-plan Roth rollovers may be made from all of a participant's vested accounts (including earnings), e.g., elective deferrals under a 401(k), 403(b), or governmental 457(b) plan, matching contributions, profit sharing contributions, and safe harbor contributions.
- A plan sponsor may limit the timing of and the accounts eligible for in-plan Roth rollovers on a nondiscriminatory basis.
- Withholding is not required with respect to in-plan Roth rollovers of nondistributable amounts, nor is voluntary withholding permitted. As a result, a participant who desires to make an in-plan Roth rollover will need to consider increasing his or her withholding from other amounts or make estimated tax payments to avoid any underpayment penalty.
- With respect to an optional change in plan design, a retirement plan generally must be amended by the end of the plan year in which the amendment is to be effective. However, the Notice provides a transition amendment period through December 31, 2014 in order to permit the expansion of in-plan Roth rollovers for 2013 for 401(k) and governmental 457(b) plans. In addition, 403(b) plans are permitted to adopt the amendment by the later of the plan's remedial amendment period or the last day of the first plan year in which the amendment is effective. The Notice provided that the amendment also may include the following related amendments (i) an amendment to permit Roth contributions and (ii) an amendment permitting the plan to accept Roth rollovers.
- If a participant's first designated Roth contribution to the plan is in the form of an in-plan Roth rollover, the 5-year distribution clock begins running on the first day of the participant's taxable year in which the rollover occurs.
In-plan Roth rollovers are an attractive feature for many plan participants and the Notice gives plan sponsors a great deal of flexibility to add this feature.