Senate Passes Bill to Expand 401(k) Roth Access, But…

Last week the U.S. Senate approved a bill that would permit 401(k) plan participants to convert pre-tax contributions to a Roth account within their 401(k) plan (see Senate Bill Would Permit Roth Conversion Within 401(k)s).  However, the language in the bill limits such conversions to “distributable events” – that is, only applicable to monies that would be eligible for a distribution.  Moreover, the bill would seem to suggest that the participant must first request a distribution, receive it, and then redeposit it to the 401(k) in Roth status.     

Relief Requested

Groups supporting the measure – including the Profit Sharing / 401k Council of America, the United States Chamber of Commerce, the ERISA Industry Committee, the Society for Human Resource Management (SHRM), and the American Society of Pension Professionals & Actuaries (ASPPA) – had noted that participants could only take advantage of a Roth conversion opportunity created by the Pension Protection Act of 2006 (PPA) if they move their savings out of their employer plans⁽¹⁾.  The groups had noted that this increased the opportunities for leakage, “exposing most of them to higher fees in the retail environment, and foregoing other benefits of employer plans, such as fiduciary oversight, spousal benefit protections, and high quality investment options at lower costs.”      

The groups had requested that 401(k) and 403(b) plans be put on a parity with IRAs, so that a participant could convert traditional retirement savings (i.e., employee elective deferrals and after-tax contributions, and employer contributions) into Roth savings within their 401(k) or 403(b) plan and to roll monies from all eligible retirement plans, including Roth IRAs, into the designated Roth account of a 401(k) or 403(b) plan. 

The groups had also sought to exempt Roth 401(k) and 403(b) money from the minimum distribution rules in the same manner that Roth IRAs are not subject to those rules.

===========================================================     

⁽¹⁾ Starting in 2010, the income limit of $100,000 for conversions from traditional IRAs and employer plans into Roth IRA savings expires. During 2010, individuals who convert to a Roth IRA will be allowed to pay the tax liability over a two-year period. Conversions cannot occur within the designated Roth account of an employer plan, and Roth IRAs cannot be rolled into an employer plan. Given these factors, experts expect significant conversions from employer plan savings into Roth IRAs to take place during 2010 and beyond.  See also The 800 lb. Tax Gorilla.

The applicable language from the bill is below:

SEC. 6__. ROLLOVERS FROM ELECTIVE DEFERRAL PLANS TO ROTH DESIGNATED ACCOUNTS.

    (a) In General.--Section 402A(c) of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

    ``(4) TAXABLE ROLLOVERS TO DESIGNATED ROTH ACCOUNTS.--

    ``(A) IN GENERAL.--Notwithstanding sections 402(c), 403(b)(8), and 457(e)(16), in the case of any distribution to which this paragraph applies--

    ``(i) there shall be included in gross income any amount which would be includible were it not part of a qualified rollover contribution,

    ``(ii) section 72(t) shall not apply, and

    ``(iii) unless the taxpayer elects not to have this clause apply, any amount required to be included in gross income for any taxable year beginning in 2010 by reason of this paragraph shall be so included ratably over the 2-taxable-year period beginning with the first taxable year beginning in 2011.

   Any election under clause (iii) for any distributions during a taxable year may not be changed after the due date for such taxable year.

    ``(B) DISTRIBUTIONS TO WHICH PARAGRAPH APPLIES.--In the case of an applicable retirement plan which includes a qualified Roth contribution program, this paragraph shall apply to a distribution from such plan other than from a designated Roth account which is contributed in a qualified rollover contribution to the designated Roth account maintained under such plan for the benefit of the individual to whom the distribution is made.

    ``(C) OTHER RULES.--The rules of subparagraphs (D), (E), and (F) of section 408A(d)(3) (as in effect for taxable years beginning after 2009) shall apply for purposes of this paragraph.''.