The Small Business Jobs Act of 2010 permits in-plan rollovers to a Roth account effective for all distributions made after Sept. 27, 2010. Prior to this law, Participants had to roll money out of their retirement plan to a Roth IRA to invest after-tax.
In 2010 only, a one-time special tax rule allows a rollover from a taxable account to a Roth Account completed in 2010 can be included in income in 2011 and 2012.
Because of this unique opportunity, it was necessary for the IRS to release some guidance on questions that were not answered in the Small Business Jobs Act.
Notice 2010-84 (issued Friday November 26th) clarifies a number of issues regarding in-plan conversions to a Roth account (in-plan Roth rollovers) including:
- Clarifying that 401(k) and 403(b) plans may retroactively amend plans for in-plan Roth rollovers;
- 402(f) notices need to be modified to add in-plan Roth rollover information (although safe harbor notices do not require modification for 2010 and 2011); and
- Clarifying several taxation and distribution issues.
What Can Be Rolled Over
Any taxable, eligible rollover distribution can be rolled over (in-service or after termination distributions). The plan may also provide that in-plan Roth rollovers are allowed for any permissible distribution under the Code while the plan may have more restrictive distribution requirements.
For example: plans may be amended to provide that in-service distributions are permitted at age 59-1/2 for in-plan Roth rollovers while the plan provides for no in-service distributions at a specified age.
Plans need to consider whether in-plan Roth rollovers will be allowed for any distribution under the plan (in-service and after termination distributions) or whether additional options will be available for purposes of in-plan Roth rollovers. Note that in-plan Roth rollovers are only permissible if the distribution is an eligible rollover distribution.
What Must be Done Before an In-plan Roth Rollover May Occur
The written plan must provide for 401(k)/403(b) elective deferrals. The plan can retroactively amend to provide for Roth deferrals but participants must be notified that they may begin making Roth elective deferrals. In-plan Roth rollovers made in 2010 will be includible in gross income in 2011 and 2012 unless the participants elect to have the income included in 2010.
Click here for the IRS Rollover Chart that has been updated to include the new in-plan Roth rollover option that is now in effect.