NOVEMBER 2010 Newsletter
401(k) Plan Roth Conversions
October 15, 2010
(Transamerica Retirement Services) – On September 27, 2010,
President Obama signed into law the Small Business Jobs and
Credit Act of 2010 ("Small Business Jobs Act"). One provision
of this new law, "In-Plan" Roth Conversions, will have an impact
on 401(k) plans.
"In-Plan" Roth Conversions
This provision of
the new law allows participants in 401(k) plans to convert
non-Roth plan amounts that are distributable as an eligible
rollover distribution to Roth amounts within the plan. Amounts
become distributable as an eligible rollover distribution
following the occurrence of one of several statutorily defined
events, including the termination, disability, or death of the
participant and the participant's attainment of age 59½. Certain
distributions, including hardship distributions and required
minimum distributions, are not eligible rollover distributions,
and are thus not eligible for conversion under the new law.
401(k) plan sponsors will be able to adopt the conversion option
in 2010. As with any new law, there are a number of unanswered
questions concerning the implementation of these provisions.
However, here is what we do know about the in-plan conversion
The conversion provision is
optional; there is no requirement for plan sponsors to add
it to their Roth plans.
Plan sponsors must offer a Roth feature as part of the plan
(for ongoing Roth contributions) in order to permit Roth
conversions within the plan.
Plan sponsors must offer a
Roth feature as part of the plan (for ongoing Roth
contributions) in order to permit Roth conversions within
The conversion election is
only available to participants who have a distributable
event that would allow them to withdraw the conversion
amounts from the plan.
The conversion election can only apply to amounts that are
treated as eligible rollover distributions. This means that
distributions such as hardship withdrawals, required minimum
distribution payments, corrective distributions and other
such payments would not qualify for the in-plan Roth
It appears that all vested
amounts available to the participant as an eligible rollover
distribution can be converted to Roth amounts within the
plan (e.g., pre-tax deferral, after-tax employee
contribution and certain vested employer contribution
Any taxable amounts that are converted to Roth amounts as
part of the in-plan conversion will be taxable to the
participant in the tax year in which the conversion takes
place. However, there is a special rule for 2010
conversions: if the in-plan conversion is completed by
December 31, 2010, the participant will be able to defer the
taxes due for 2010 ratably over two years - in 2011 and
2012. According to IRS guidance, once a conversion election
is made for 2010, it may not be revoked after the due date,
including extensions, for filing the 2010 federal tax
The conversion election is
available for participants and spousal beneficiaries.
The IRS has not issued guidance regarding plan amendment
requirements to implement in-plan Roth conversions, but we
anticipate that the IRS will provide sufficient time for
plan sponsors to timely adopt the provision.
Impact on Plan Sponsors
The new law enables 401(k) plan sponsors to allow Roth
conversions within the plan without forcing the participants
to distribute the funds from the employer's retirement plan.
Transamerica Retirement Service's Response
Transamerica is undertaking an in-depth and thorough
analysis of the new law and
impact on its recordkeeping system for Roth plans. Once this
analysis is completed, they will determine the earliest date
on which they will be in a position to administratively
support these new optional plan provisions without eroding
the quality of their services. They will issue an
announcement to their clients once they have made the
information about the Small Business Jobs Act, please read this
analysis prepared by the Transamerica Center for Retirement
Studies ("The Center"). The Center is a non-profit corporation
dedicated to educating the American public on trends, issues,
and opportunities related to saving and planning for retirement
and achieving financial security in retirement.
Successor Plan Rule
provided for review and consideration only. Please consult legal and tax
practical advice pertaining to your business and personal situations.
in our newsletter may have been extracted in whole or in part from the
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This page was last reviewed and/or updated
Friday, July 03, 2015 05:21 PM