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In-Plan Roth Rollovers

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Jaxine L. Wintjen, CP
Foster Swift Employment, Labor & Benefits E-News
December 7, 2010

On November 26, 2010, the IRS issued guidance for 401(k) and 403(b) plans that permit "in-plan Roth rollovers."  This new feature allows plan participants to roll over eligible rollover distributions made after September 27, 2010 from a non-Roth account into a designated Roth account in the same plan.  A non-Roth account means any plan account that does not hold designated Roth contributions.  Surviving spouse beneficiaries and alternate payees who are current or former spouses are also eligible to make an in-plan Roth rollover. 

Plan Amendments

A plan may be amended to allow in-service distributions from the plan's non-Roth accounts conditioned on the participant rolling over the distribution in an in-plan Roth direct rollover.  However, the plan cannot impose this condition on any existing distribution options available under the Plan.

401(k) and 403(b) plans have extended deadlines to amend the plan to allow 2010 in-plan Roth rollovers.  The amendment must be retroactively effective to the date the plan was first operated to permit in-plan Roth rollovers.  The amendment deadlines are described below.

  • 401(k) plans have until the later of the last day of the year in which the amendment is effective or December 31, 2011.
  • Safe harbor 401(k) plans have until the later of the day before the first day of the plan year in which the safe harbor plan provisions are effective or December 31, 2011.
  • 403(b) plans have until the later of the plan's remedial amendment period or the last day of the first plan year in which the amendment is effective.
  • Governmental 457(b) plans may adopt an amendment to include a designated Roth account after December 31, 2010, and then allow in-plan Roth rollovers.

Types of In-Plan Roth Rollovers

Two types of in-plan Roth rollovers are permitted.

  • In-plan Roth direct rollovers where the plan trustee transfers an eligible rollover distribution from a participant's non-Roth account to the participant's designated Roth account in the same plan.
  • In-plan Roth 60-day rollovers where the participant deposits an eligible rollover distribution within 60 days of receiving it from a non-Roth account into a designated Roth account in the same plan.

Administrative Considerations

A plan may have to allocate in-plan Roth rollovers for a participant to a separate account maintained solely for the rolled over amounts.

A distribution rolled over as an in-plan Roth direct rollover is not treated as a distribution for the following purposes:

  • Transferring a plan loan to the designated Roth account without changing its repayment schedule;
  • Requiring spousal consent;
  • Requiring a participant's consent before an immediate distribution of an accrued benefit of more than $5,000; and
  • Eliminating a participant's right to optional forms of benefit.

If a plan offers in-plan Roth rollovers, it must include a description of this feature in the written explanation the plan provides to participants who receive an eligible rollover distribution (the Code Section 402(f) Notice).  If the plan uses the IRS safe harbor explanation, that explanation should be modified to describe the in-plan Roth rollover feature.

In-plan Roth rollovers are not subject to the 10% additional tax on early distributions (prior to age 59½), nor are they subject to the mandatory 20% withholding rules.  An individual who makes an in-plan Roth direct rollover may need to increase his or her federal income tax withholding or make estimated tax payments to avoid an underpayment of tax penalty.  However, if the plan distributes any part of the in-plan Roth rollover within a 5-year period, the distribution will be subject to the 10% early distribution tax unless another exception applies.  For this purpose, the 5-year period begins January 1 of the year of the in-plan Roth rollover and ends on the last day of the fifth year of that period.

Special Rules for 2010 In-Plan Roth Rollovers

The participant generally reports the taxable amount of an in-plan Roth rollover in the taxable year in which he or she receives the distribution.  However, for in-plan Roth rollovers completed in 2010, the participant may:

  • Report half of the taxable amount in 2011 and the other half in 2012; or
  • Elect to report the entire taxable amount in 2010.

If the participant elects to include the taxable amount in 2010, this election applies to all of his or her in-plan Roth rollovers in 2010, and the participant may not revoke the election after the due date (including extensions) of his or her 2010 tax return.

In order to be eligible for the 2-year income spread, the distribution to be rolled over in an in-plan Roth rollover must be made no later than December 31, 2010.  The plan must have a designated Roth account in place at the time the distribution is rolled over. 

Special income acceleration rules apply if the participant later receives a distribution of any amount of the taxable portion of the in-plan Roth rollover in 2010 or 2011 that would not have been included in gross income until 2011 and 2012.  Under these rules, the participant must increase gross income in the year of the distribution by the amount of the distribution that the participant could have postponed to 2012.

Other Considerations

  • Unlike a conversion or rollover to a Roth IRA, a participant may not recharacterize any amount of an in-plan Roth rollover.
  • If an outstanding loan is part of an in-plan Roth rollover, the taxable amount of the rollover is the balance of the loan.

Reporting 2010 In-Plan Roth Rollovers

401(k) and 403(b) in-plan Roth direct rollovers must be reported on Form 1099-R in the following manner:

  • The amount rolled over is included in box 1 (gross distribution).
  • The taxable amount rolled over is included in box 2a (taxable amount).
  • Do not check box 2b (taxable amount not determined).
  • The basis in the amount rolled over is included in box 5 (employee contributions).
  • Distribution code G should be used in box 7.

Plans must report any distributions made in 2010 from designated Roth accounts allocable to an in-plan Roth rollover on a separate Form 1099-R.  Report the distribution as you would any other distribution from a designated Roth account.  However, in the blank box to the left of box 10, the participant must enter the amount of the distribution allocable to the in-plan Roth rollover.

Plan participants who make an in-plan Roth rollover in 2010 must:

  • File Form 8606, Nondeductible IRAs, with their 2010 tax return.
  • Complete Form 8606, Part III, to report the in-plan Roth rollover.
  • Complete certain lines of Form 8606, Part IV, if they receive a distribution in 2010 of any amount of their in-plan Roth rollover.
  • Complete Form 8606, Part II, to report any amount converted from a non-Roth IRA to a Roth IRA in 2010.
  • A separate Form 8606 must be completed if the participant also rolled over amounts from a qualified retirement plan to a Roth IRA in 2010.

Additional information regarding reporting can be found on the IRS web page at www.irs.gov under Changes to Current Tax Forms, Instructions and Publications.