On December 11, 2013, the IRS issued IRS Notice 2013-74 which provides guidance on in-plan Roth rollovers. An in-plan Roth rollover is a rollover within a Section 401(k), Section 403(b) or governmental Section 457(b) plan to a designated Roth account in the same plan. Notice 2013-74 expands the types of contributions that may be rolled over by an in-plan Roth rollover and supplements previous guidance on this topic.
Designated Roth contributions, governed by Section 402A of the Internal Revenue Code (the “Code”), are elective deferrals to a retirement plan, otherwise excludable from gross income, that a participant elects to include in gross income. An individual’s designated Roth contributions, along with associated earnings, must be maintained in a separate account under the plan. Pursuant to an in-plan Roth rollover, a distribution from an individual’s account in a retirement plan, other than a designated Roth account, may be rolled over to the individual’s designated Roth account in the same plan.
Until now, based on guidance under the Small Business Jobs Act of 2010 (“SBJA”), which first provided for in-plan Roth rollovers, in-plan Roth rollovers were limited to “otherwise distributable amounts” (where a plan participant had attained age 59 ½ or terminated employment). However, Code Section 402A(c)(4)(E) was added by the American Taxpayer Relief Act (“ATRS”), effective for in-plan Roth rollovers made after December 31, 2012. Under this new rule, a plan can permit an in-plan Roth rollover of “otherwise nondistributable amounts” in addition to the amounts already deemed rollover eligible under the SBJA. Accordingly, as explained further in Notice 2013-74, the following amounts are now eligible for in-plan Roth rollovers, regardless of whether the amounts otherwise satisfy conditions for distributions:
elective deferrals in 401(k) plans and 403(b) plans;
matching contributions and nonelective contributions, including qualified matching contributions and qualified nonelective contributions; and
annual deferrals made to governmental 457(b) plans.
Notice 2013-74 clarifies that an amount rolled over to an individual’s designated Roth account pursuant to an in-plan Roth rollover remains subject to the plan’s distribution restrictions otherwise applicable to that amount before the in-plan Roth rollover. As an example, the guidance describes a 401(k) plan participant who makes an in-plan Roth rollover of an amount not otherwise eligible for distribution because the participant has not yet terminated employment or attained age 59 ½. In that case, the amount rolled over and any applicable earnings may not be distributed from the designated Roth account prior to the occurrence of a distribution event.
The deadline for adopting an amendment providing for in-plan Roth rollovers is the later of the last day of the first plan year for which the amendment is effective or December 31, 2014, provided the amendment is effective as of the date the plan first operates in accordance with the amendment. This extended deadline also applies to plan amendments that allow for elective deferrals under the plan to be designated as Roth contributions, allow for the acceptance of rollover contributions by designated Roth accounts, or permit in-plan Roth rollovers of some or all otherwise distributable amounts. The guidance also notes that, subject to the normal nondiscrimination rules that apply to plan benefits, rights and features, plans may restrict the types of contributions eligible for in-plan Roth rollovers, as well as the frequency of such rollovers.
Those interested in amending plans to satisfy the new rules in Notice 2013-74 should consider their options carefully and consult with counsel to make sure the technical rules are all followed.