Roth 401(k) Plans...

The IRS has released regulations regarding Roth 401(k) (m) and 403(b)’s which are effective for plan years beginning on or after January 1, 2006. Section 617(a) of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added a new code-IRC 402A permitting participants in cash or deferred arrangements to have Roth-style accounts in both 401(k) and 403(b) plans. The new rules permit, but do not require, plans to offer participants the ability to make some or all (at the participant’s choice) of their deferrals on an after-tax basis. The benefit of paying taxes when the “Roth” deferral is made is that the deferral, together with its earnings, will be distributed tax-free if the distribution is “qualified”.

Two of the benefits of the Roth 401(k) are: 1) the annual contribution limit is higher under the 401(k) plan $18,000 in 2017 (plus $6,000 of catch-up if age 50 or older) vs. the Roth IRA limit of $5,500 in 2017 (plus $1,000 of catch-up if age 50 or older); and 2) all participants, regardless of income level, can make Roth contributions to a 401(k) plan.

The following issues need to be considered for participant contributions to be designated Roth 401(k) contributions:

  • The participant’s election must irrevocably designate the contribution as a Roth 401(k) contribution before the date the contribution is made to the plan.
  • Roth 401(k) and pre-tax 401(k) are limited to a combined total of $18,000 or $24,000 if participant is over age 50.
  • From a payroll perspective, the contribution must be treated as an after-tax contribution.
  • Roth 401(k) contributions are treated as elective deferrals for purposes of the ADP test and must be subject to the same restrictions as pre-tax elective deferrals.
  • Existing pre-tax deferral accounts may be converted to Roth 401(k) accounts.
  • If the plan currently matches 401(k) deferrals, then the formula will apply to the Roth 401(k) contributions and are considered a pre-tax match.
  • A separate plan account must be established and maintained for the Roth 401(k) contributions and the allocable share of the gains or losses.
  • Roth 401(k) accounts are not subject to the minimum required distribution rules of 401(a) (9).
  • Distributions of the Roth contributions and earnings will not be taxed provided they are made after the 5 year period beginning with the first taxable year the Roth 401(k) contribution was made and payment is made due to death, disability or reaching age 59½.

Roth 401(k) Distributions can be rolled to a Roth IRA; however a Roth IRA cannot be rolled into a Roth 401(k). The years accumulated under the five-taxable-year rule in a plan do not carry over to funds transferred to a Roth IRA. However, if the Roth IRA already exists, the transfer picks up the years already on the record for the Roth IRA.


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