In-Plan Rollovers to Roth Accounts

By Sally P. Schreiber, J.D.

From the IRS

The IRS released rules in question-and-answer format for in-plan rollovers to designated Roth accounts in retirement plans (Notice 2013-74). The most significant part of the guidance concerns the mechanics of making an in-plan rollover of funds from Sec. 401(k), 403(b), or 457(b) governmental plans, which is now permitted for rollovers of “otherwise nondistributable amounts” (i.e., because the plan participant has not reached age 59½ or left the company) made after Dec. 31, 2012.

These new rules for in-plan Roth rollovers under Sec. 402A(c)(4)(E) were added by Section 902 of the American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, to raise revenue by encouraging in-plan Roth rollovers. The rules permit rollovers of funds from the tax-deferred accounts noted above without being subject to the 10% penalty for early withdrawals in Sec. 72(t), but still result in the plan participants’ paying income tax on the amount of the rollover. Before the amendment, these rollovers could be made without the penalty only for “otherwise distributable amounts,” which meant the participant had to reach age 59½ or have a severance from employment.

The notice contains a number of questions and answers, including how a rollover will be treated for purposes of determining whether a plan is top-heavy under Sec. 416, and whether discontinuing in-plan Roth rollovers would violate the Sec. 411(d)(6) prohibition on decreasing accrued benefits.

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