The Small Business Jobs Act of 2010 enacted rules under which 401(k), 403(b), and governmental 457(b) plans may provide for in-plan rollovers to designated Roth accounts of contributions that were “otherwise distributable” and eligible for rollover. Starting in 2013, the in-plan Roth rollover rules were further modified by the American Taxpayer Relief Act of 2012 (ATRA) to allow those transfers even if the participant is not then able to withdraw the amounts from the plan. Thus, for example, for salary deferral amounts in these plans, the age 59 1/2 restriction on distributions no longer restricts the ability to make an in-plan Roth rollover. In response to questions raised by ATRA’s expansion of the in-plan Roth rollover rules, the IRS issued new guidance in the form of IRS Notice 2013-74. Highlights from the new guidance include:
- Otherwise nondistributable amounts must be fully vested to be eligible for an in-plan Roth rollover.
- In-plan Roth rollovers of otherwise nondistributable amounts may not use the 60-day rollover rule (it must be made by direct rollover), and a § 402(f) notice is not required for a participant making an in-plan Roth rollover of an otherwise nondistributable amount.
- The following contributions (and earnings thereon) may now be rolled over to a designated Roth account in the same plan: elective deferrals, matching contributions, and nonelective employer contributions (including QNECs, QMACs, and safe harbor contributions).
- If an amount is rolled over to a designated Roth account, the amount rolled over and applicable earnings remain subject to the distribution restrictions that were applicable to the amount before the in-plan Roth rollover.
- Because an in-plan Roth rollover of an otherwise nondistributable amount must be made by a direct rollover, no mandatory 20 percent withholding applies. And no part of the rollover may be subject to voluntary withholding.
- The deadline for adopting a plan amendment that permits in-plan Roth rollovers of otherwise nondistributable amounts is extended to the later of the last day of the first plan year in which the amendment is effective or December 31, 2014. The extended amendment deadline also applies to (i) a plan amendment that permits elective deferrals under the plan to be designated as Roth contributions, (ii) a plan amendment that provides for the acceptance of rollover contributions by designated Roth accounts, and (iii) a plan amendment that permits in-plan Roth rollovers of some or all otherwise distributable amounts.
- Sponsors of safe harbor plans are permitted to make a mid-year change to provide for in-plan Roth rollovers of otherwise nondistributable amounts during a temporary period that ends December 31, 2014.
- An employee’s ability to make an in-plan Roth rollover is not a section 411(d)(6) protected benefit and can be eliminated as long as the elimination does not have the effect of discriminating significantly in favor of highly compensated employees.