Recently, the Internal Revenue Service (“IRS”) issued Notice 2013-74 to provide guidance regarding rollovers within a retirement plan to designated Roth accounts within the same plan. The full text of Notice 2013-74 is available here. This guidance, provided in a question-and-answer format, expands the amounts and contributions which are eligible for in-plan Roth rollovers and also provides extended time periods for plans to adopt amendments allowing these rollovers.

The Small Business Jobs Act of 2010 allowed individuals with 401(k), 403(b), or 457(b) retirement plans to rollover otherwise distributable amounts to designated Roth accounts within their same retirement plan. Due to the limitation that the amounts must be “otherwise distributable,” only individuals who had attained age 59 ½ or met other qualifying requirements, such as having a separation from service, could take advantage of the in-plan rollovers.

The American Taxpayer Relief Act of 2012 amended the Internal Revenue Code (the “Code”) to allow otherwise nondistributable amounts to be rolled-over to in-plan designated Roth accounts. Pursuant to the recently released IRS guidance, elective deferrals, matching contributions, nonelective contributions, annual deferrals to 457(b) governmental plans, and the earnings on these amounts may be rolled-over to an in-plan designated Roth account as long as the plan participant is fully vested in the amounts that are to be rolled over. Rollovers are not treated as distributions. However, participants choosing to make in-plan rollovers to Roth accounts will be required to pay income tax on the full amount transferred during the year in which the transfer occurs. Also, any rolled-over amounts will remain subject to the distribution requirements that were applicable to the amount prior to the in-plan rollover.

IRS guidance also provides extended deadlines for amending plans to allow in-plan Roth rollovers of nondistributable amounts. Amendments allowing these in-plan rollovers are discretionary amendments and generally must be adopted by the last day of the plan year in which the amendment will be effective. However, the IRS has extended this deadline to the later of the last day of the first plan year in which the amendment is effective or December 31, 2014, provided that the amendment is effective as of the first day the plan allows in-plan rollovers. 401(k) safe harbor plans may make mid-year changes to allow in-plan Roth rollovers until December 31, 2014. This extended deadline also applies to related amendments, such as amendments allowing deferrals to be designated as Roth contributions, amendments allowing Roth Accounts to accept rollover contributions, and amendments allowing distributable amounts to be rolled-over to an in-plan Roth account. Plan amendments may limit the type of contributions which are eligible for in-plan Roth rollovers or the frequency with which participants may make such rollovers. Also, the IRS guidance states that the ability to make in-plan Roth rollovers is not a protected benefit. Therefore, plan amendments may eliminate the participants’ ability to make in-plan rollovers to designated Roth accounts.

Action Items

The IRS guidance affects plan sponsors, plan administrators and plan participants. Participants should determine if their plan allows for in-plan rollovers to designated Roth accounts, and if making a rollover is in their best interest. Participants should be aware that making a rollover may require an adjustment to their income tax withholding amounts in order to avoid underpayment penalties. Plan sponsors and plan administrators should evaluate whether this new guidance is applicable to their retirement plans, and if so, consider possibly amending the plan to allow in-plan rollovers of otherwise nondistributable amounts. If plan sponsors or plan administers decide to make such amendments, actions should be taken to prepare property adopt the plan amendments and communicate the amendment to plan participants and beneficiaries.

Fraser Stryker is a nationally recognized leader in employee benefits and tax law. Attorneys in the Firm’s Employee Benefits & ERISA Practice Group advise businesses, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters, transactions, and litigation. Fraser Stryker helps employers implement and maintain innovative and cost-effective employee benefit plans that attract and retain top talent. For information regarding 401(k) plans, 403(b) plans, 457(b) plans, and providing for designated Roth accounts and in-plan rollovers, please contact Nicole R. Konen, Kevin Tracy, or Emily Wischnowski.

Formed in 1898, Fraser Stryker has grown to become a nationally recognized law firm that represents local, national, and multinational clients in complex business transactions and litigation matters. Fraser Stryker attorneys participate actively in a wide array of community organizations. Visit our home page for more information about the Firm.

This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.