|Code Section||Effective Date||Name of Act||Name of Provision||10yr Revenue Estimate ($millions)|
|402A||12/31/2012||The American Taxpayer Relief Act of 2012||Amounts in applicable retirement plans may be transferred to designated Roth accounts without distribution||12,186|
|402A||12/31/2010||The Small Business Jobs Act of 2010||Allow participants in government section 457 plans to treat elective deferrals as Roth contributions||506|
|402A||*See Notes on Effective Date||The Small Business Jobs Act of 2010||Allow rollovers from elective deferral plans to designated Roth accounts||5,099|
* Notes on Effective Date
The provision is effective for distributions made after the date of enactment (9/27/2010).
Amounts in applicable retirement plans may be transferred to designated Roth accounts without distribution
Explanation of Provision
The provision expands the amounts eligible for in-plan Roth direct rollover to include amounts that are not distributable under the plan. Under the provision, a section 401(k) plan (including TSP), a section 403(b) plan or a governmental section 457(b) plan that includes a qualified Roth contribution program is permitted to allow individuals to elect an in-plan transfer of any amount not otherwise distributable under the plan from an account that is not a designated Roth account under the plan to a designated Roth account maintained under the plan for the benefit of the individual.
This in-plan transfer is treated as an in-plan Roth direct rollover, even though the plan may not otherwise be allowed to provide for distribution of the amount transferred. Thus, as in the case of present-law in-plan Roth direct rollovers, the transfer is essentially a form of Roth conversion, and the amount transferred is subject to the rules that apply to conversions from a traditional IRA into a Roth IRA. Thus, the amount transferred is includible in gross income (except to the extent it represents a return of after-tax contributions), and the 10-percent early distribution tax does not apply unless the special recapture rule applies based on a subsequent distribution.
The provision specifies that a plan is not treated as violating the distribution restrictions applicable to section 401(k), 403(b) and governmental section 457(b) plans solely by reason of an in-plan transfer under the provision. An in-plan transfer under the provision is also permitted for an amount that is not distributable for any other reason. For example, if an amount in a profit-sharing plan is not distributable because the requisite fixed number of years have not elapsed, the plan would not be treated as violating this distribution limitation solely by reason of an in-plan transfer of such amount under the provision. Moreover, the statutory provision governing TSP distributions is not violated solely by reason of an in-plan transfer under the provision.
Similar to an in-plan Roth direct rollover for otherwise distributable amounts, an amount transferred in an in-plan transfer under the provision merely changes the account in a plan under which an amount is held and the tax character of the amount. Thus, the provision does not change the basic character of these amounts as not being distributable under the plan. For example, an amount subject to a distribution restriction in a section 401(k), section 403(b) or governmental section 457(b) plan before an in-plan transfer must remain subject to the relevant distribution restriction after the transfer. As a further example, an amount in a profit-sharing plan that is not distributable because the requisite fixed number of years has not elapsed remains not distributable for the remainder of the fixed number of years.
Allow participants in government section 457 plans to treat elective deferrals as Roth contributions
Explanation of Provision
The provision amends the definition of ‘‘applicable retirement plan’’ to include eligible deferred compensation plans (as defined under section 457(b)) maintained by a State, a political subdivision of a State, an agency or instrumentality of a State, or an agency or instrumentality of a political subdivision of a State (collectively, ‘‘governmental 457(b) plans’’). The provision also amends the definition of ‘‘elective deferral’’ in section 402A to include amounts deferred under governmental 457(b) plan.
Allow rollovers from elective deferral plans to designated Roth accounts
Explanation of Provision
Under the provision, if a section 401(k) plan, section 403(b) plan, or governmental section 457(b) plan 1482 has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. However, a plan that does not otherwise have a designated Roth program is not permitted to establish designated Roth accounts solely to accept these rollover contributions. Thus, for example, a qualified employer plan that does not include a qualified cash or deferred arrangement with a designated Roth program cannot allow rollover contributions from accounts that are not designated Roth accounts to designated Roth accounts established solely for purposes of accepting these rollover contributions. Further, the distribution to be rolled over must be otherwise allowed under the plan. For example, an amount under a section 401(k) plan subject to distribution restrictions cannot be rolled over to a designated Roth account under this provision. However, if an employer decides to expand its distribution options beyond those currently allowed under its plan, such as by adding in-service distributions or distributions prior to normal retirement age, in order to allow employees to make the rollover contributions permitted under this provision, the plan may condition eligibility for such a new distribution option on an employee’s election to have the distribution directly rolled over to the designated Roth program within that plan.
In the case of a permitted rollover contribution to a designated Roth account under this provision, the individual must include the distribution in gross income (subject to basis recovery) in the same manner as if the distribution were rolled over into a Roth IRA. Thus the special rule for distributions from eligible retirement plans (other than from designated Roth accounts) that are contributed to a Roth IRA in 2010 applies for these rollover contributions to a designated Roth account. Under this special rule, the taxpayer is allowed to include the amount in income in equal parts in 2011 and 2012. The special recapture rule for the 10-percent early distribution tax also applies if distributions are made from the designated Roth account in the relevant five year period.
This rollover contribution may be accomplished at the election of the employee (or surviving spouse) through a direct rollover (operationally through a transfer of assets from the account that is not a designated Roth account to the designated Roth account). However, such a direct rollover is only permitted if the employee (or surviving spouse) is eligible for a distribution in that amount and in that form (if property is transferred) and the distribution is an eligible rollover distribution. If the direct rollover is accomplished by a transfer of property to the designated Roth account (rather than cash), the amount of the distribution is the fair market value of the property on the date of the transfer.
A plan that includes a designated Roth program is permitted but not required to allow employees (and surviving spouses) to make the rollover contribution described in this provision to a designated Roth account. If a plan allows these rollover contributions to a designated Roth account, the plan must be amended to reflect this plan feature. It is intended that the IRS will provide employers with a remedial amendment period that allows the employers to offer this option to employees (and surviving spouses) for distributions during 2010 and then have sufficient time to amend the plan to reflect this feature.1483
1482- The bill includes a provision which adds governmental section 457(b) plans to the plans that are permitted to include a designated Roth program. See explanation of section 211 of the bill.
-Return to Explanation of Provision
1483- See section 401(b), Treas. Reg. sec 1.401(b)–1, and Rev. Proc. 2007–44, 2007–2 CB 54, regarding remedial amendment periods for plan amendments.
-Return to Explanation of Provision