Roth Conversion Update

Shared from Lockton Companies, LLC (view original)

Last fall we issued a Beacon Alert on Roth conversions’ permissibility within an employer sponsored plan. The inclusion of the Roth provisions in the Small Business Jobs Act and its immediate effectiveness left many in the industry scrambling to build systems around managing, administering and record keeping the conversion process. In addition there were several questions left unanswered as to the application and tax consequences of the allowance. In response, the Internal Revenue Service issued Notice 2010-84 providing guidance relating to in-plan conversions of non-Roth amounts from a 401(k) or 403(b) plan to a designated Roth account within the same plan. Below is a summary of the highlights of the notice.

Eligible Participants

Besides plan participants, surviving spouse beneficiaries and alternate payees who are current or former spouses are also eligible to do an in-plan Roth rollover.

Types of In-plan Roth Rollovers

In-plan Roth direct rollover- when there is a transfer of an eligible rollover distribution from a participant’s non-Roth account to the participant’s designated Roth account in the same plan. In-plan Roth 60-day rollover- when the participant deposits an eligible rollover distribution within 60 days of receiving it from a non-Roth account into a designated Roth account in the same plan.Distribution Treatment

While in-plan Roth conversion is treated as a distribution for certain purposes, it is not treated as a distribution for purposes of the following:

Plan loans- Transferring a plan loan to the designated Roth account without changing its repayment schedule is not considered a new loan. The taxable amount of the conversion is the loan balance. Spousal consent- A married participant is not required to obtain spousal consent for the conversion. Special Notice of the Right to Defer Distribution- This notice is not triggered by an in-plan Roth conversion, however, the amount rolled over continues to be taken into account in determining whether the participant’s accrued benefit exceeds $5,000. Elimination of Optional Forms of Benefit- The distribution rights to a participant (such as the right to an immediate distribution of the rolled over amount) prior to the rollover cannot have this right eliminated through an in-plan Roth direct rollover.

Plan Amendment/Administrative Requirements

A Roth program must be in place before an in-plan conversion can be made. The program is in place if: notice is given, the plan includes a Roth feature, and a plan amendment is made allowing the conversion feature. According to the Notice the plan can be amended retroactively to add the conversion feature. A plan may be amended to allow non-Roth amounts (not previously permitted to be distributed under more restrictive terms of a plan) to be converted in an in-plan Roth conversion, while continuing the more restrictive distribution provisions. For example, a plan that does not permit in-service withdrawal of vested employer contributions may permit in-plan Roth conversion of those contributions while continuing to restrict the in-service distribution of the contributions.


Plan sponsors who adopt an in-plan Roth conversion feature must include information regarding the feature in the plan’s 402(f), special tax notice, to participants who request a distribution.

Taxability and Recapture

Participants will realize a taxable amount on a conversion that is equal to the fair market value of the converted amount reduced by any basis the individual has in the converted amount. This amount is includible in the income in the year of the conversion (Please note: There were special rules relating to the taxability of conversions made prior to December 31, 2010. This article does not address those rules).

A recapture rule applies when a plan distributes any part of the in-plan Roth rollover within a 5- taxable year period, making the distribution subject to the 10% additional tax on early distributions under Code §72(t) unless an exception to the tax applies or the distribution is allocable to any nontaxable portion of the in-plan Roth rollover. The 5-taxable-year period begins January 1 of the year of the in-plan Roth rollover and ends on the last day of the fifth year of that period.

The recapture rules does not apply when the participant rolls over the distribution to another designated Roth account or to their Roth IRA but does apply to a subsequent distribution from the

rolled over amount or IRA within the 5-taxable-year-period.

While Notice 2010-84 has provided guidance and clarified many questions surrounding the conversion feature, some record keepers are still trying to administratively build systems and processes surrounding these accounts. The result, while this conversion feature has been legislatively permissible for months it continues to not be administratively possible for some plans.

If you have questions about Roth conversion or the availability of this feature to your plan please contact your Lockton service team.

Securities offered through Lockton Financial Advisors, LLC a registered broker-dealer and member FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, a SEC registered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.

Nothing in this message should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton’s compliance services group are not privileged under the attorney-client privilege.

Circular 230 Disclosure: To comply with regulations issued by the IRS concerning the provision of written advice regarding issues that concern or related to federal tax liability, we are required to provide to you the following disclosure: unless otherwise expressly reflected herein, any advice contained in this document (or any attachment to this document) that concerns federal tax issues is not written, offered or intended to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the IRS or promoting, marketing or recommending to another party any matters addressed in this document or any attachment.

About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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