Guidance Issued On In-Plan Roth Rollovers

Eddie Adkins for Grant Thornton writes: The IRS provided (Notice 2013-74) guidance on rollovers within a retirement plan to designated Roth accounts in the same plan. Beginning with rollovers occurring after Dec. 31, 2013, a plan may allow a participant to roll over any amount within the plan that is eligible under Section 401(c)(4).

Prior to Jan. 1, 2013, a Section 401(k) plan, a 403(b) plan or a governmental 457(b) plan that included a qualified Roth contribution program could allow employees to roll over amounts from their traditional account into a designated Roth account, but only if the participant was eligible for a distribution from the plan (e.g., the employee was at least age 59½ or had separated from service). 

This rollover results in taxable income to the participant equal to the amount rolled over into the Roth account. If the participant was not eligible for a distribution, the participant could not elect an in-plan Roth rollover. The IRS previously issued Notice 2010-84 to provide guidance on in-plan Roth rollovers. The American Taxpayer Relief Act of 2012 relaxed the in-plan Roth rollover requirements so that participants who are not eligible for a distribution under the terms of the plan could still elect an in-plan Roth rollover. Beginning with rollovers occurring after Dec. 31, 2013, a plan may allow a participant to roll over any amount within the plan that is eligible under Section 401(c)(4).

Notice 2013-74 modifies Notice 2010-84 to reflect the change in law to allow in-plan Roth rollovers of all eligible amounts. The new notice clarifies that federal income tax is not withheld on the amount rolled over into the Roth account and that the participant may not elect voluntary withholding under Section 3402(p). Subject to the nondiscrimination requirements that normally apply to plan benefits, rights and features, plan sponsors are permitted to limit the frequency of in-plan Roth rollovers and the type of contributions eligible for an in-plan Roth rollover. 

In general, a distribution from a Roth account cannot be included in the recipient's taxable income.  This exclusion does not apply if the distribution is made within the five-taxable-year period beginning with the first taxable year for which the participant contributed to the Roth account. If an in-plan Roth rollover is the first contribution to the participant's Roth account, the five-taxable-year period begins on the first day of the taxable year in which the in-plan Roth rollover occurs. For a plan to allow in-plan Roth rollovers under the new rules, the plan must be amended. Notice 2013-74 provides guidance on when that amendment must be made.