In-Plan Roth Rollovers: IRS Issues New Guidance

In-Plan Roth Rollovers

In-Plan Roth Rollovers

Code §436 Interim Amendment for 2013

The Internal Revenue Service has finally issued new guidance (Notice 2013-74) relating to rollovers of “otherwise non-distributable amounts” to designated Roth accounts in the same plan. Unfortunately, the guidance has come late in the year and some plan document providers and employers have already acted to permit these types of rollovers. Still, the guidance is useful and provides an extended amendment deadline.

Under Code §402A, as added by the Small Business Job Protection Act of 2010, a plan could include a qualified in-plan Roth rollover program to allow employees to roll over amounts from their non-Roth accounts to designated Roth accounts in the plan. To be eligible, the rollover had to be an “otherwise distributable amount.” The IRS provided guidance on in-plan Roth rollovers of otherwise distributable amounts in Notice 2010-51. Many document providers added in-plan Roth rollover provisions in their plans sometime prior to the 2013 plan year.

In-Plan Roth Rollovers

Then, under the American Taxpayer Relief Act of 2012 (ATRA 2012), Code §402A was expanded to allow in-plan Roth rollovers of “otherwise non-distributable amounts,” effective in 2013. This allowed plans to offer in-plan Roth rollovers of amounts that were otherwise ineligible for distribution from the plan. Since then, we have anxiously awaited guidance on some of the difficult issues presented by this change in the law. Notice 2013-74 answers some of the questions relating to the rollover of otherwise non-distributable amounts, including the timing of a plan amendment to reflect these rules.

No amendment needed until December 31, 2014

Allowing in-plan Roth rollovers in a plan requires a discretionary amendment. Without the guidance provided in Notice 2013-74, employers who implemented in-plan Roth rollovers in their plans for 2013 needed to amend their plans by the end of the 2013 plan year. With the new guidance, the IRS extended the amendment date (even for those who implemented in-plan Roth rollovers for otherwise nondistributable amounts in 2013) to the later of the last day of the first plan year in which theamendment is effective or December 31, 2014. In the meantime, the plan must operate in accordance with the guidance issued by the IRS and an employer must amend the plan consistent with such operation by December 31, 2014 (if the new in-plan Roth rollover provisions are first utilized in 2013 or 2014).

Continue reading: Part II