IRS Issues In-Plan Roth Rollover Guidance


The Internal Revenue Service has issued long-awaited guidance regarding the ability for participants in section 401(k), 403(b), and governmental 457(b) plans to convert balances from pre-tax and after-tax sources into Roth sources within the plan (known as “In-Plan Roth Rollovers”).

Originally, participants could elect In-Plan Roth Rollover treatment only if the amounts to be rolled over were otherwise eligible to be distributed from the plan. Congress expanded these rollovers to permit the conversion of all monies held in a section 401(k), 403(b), or governmental 457(b), whether or not eligible for distribution, as part of the American Taxpayer Relief Act of 2012. In-Plan Roth Rollovers are elective provisions that plan sponsors may choose not to offer to plan participants.

The recent IRS guidance clarifies several issues affecting In-Plan Roth Rollovers:

  • Non-vested amounts cannot be converted in an In-Plan Roth Rollover.
  • Plan sponsors are not required to distribute notices to participants explaining the taxability of distributions and availability of rollover treatment (known as a “Special Tax Notice” or a “402(f) Notice”) to participants who elect In-Plan Roth Rollovers.
  • A plan is permitted (but not required) to limit the types of plan assets (e.g., employee elective deferrals, employer matching contributions, etc.) that may be eligible for In-Plan Roth Rollovers.
  • Distribution restrictions that are applicable before an In-Plan Roth Rollover must remain in place following the conversion. For example, amounts subject to spousal consent requirements before the rollover continue to be subject to those requirements afterward.
  • The ability to perform an In-Plan Roth Rollover is not a protected benefit, therefore a plan is permitted to discontinue offering such rollovers.

Employees that wish to implement In-Plan Roth Rollovers for 2013 are permitted to do so, provided that a plan amendment setting forth the rollover provisions is adopted by December 31, 2014.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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