In-Plan Roth Conversions


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 59 ½. 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 feature:

  • 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.
  • 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 conversion.
  • 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 amounts).
  • 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 return.
  • The conversion election is available for participants and spousal beneficiaries.
  • In general, a calendar year non-safe harbor 401(k) plan that adds the Roth Conversion option must be amended by the later of December 31, 2011 or the last day of the plan year in which the Roth Conversion feature first becomes available in operation [per IRS Notice 2010-84].



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.



Pension Inc. Response

Due to the recent guidance issued by the IRS, Pension Inc. is able to immediately implement the In-Plan Roth Conversion for your plan. However, there are numerous plan design alternatives to consider before adding this option.

Please contact your Pension Inc. representative to discuss if you are interested in adding this feature.