It’s been almost 10 months since Roth 401(k) in-plan conversions were added as part of the American Taxpayer Relief Act of 2012.
After an initial flurry of media attention and a slew of industry publications, there hasn’t been much attention paid to this new tax planning technique. Could it be, perhaps, our attention has been focused on other matters such as Congressional wrangling on the budget and the debt ceiling?
Now after last’s week’s Congressional action, we can get back to other matters. At least until the next set of deadlines roll around. The recently signed bill authorized current spending through January 15, 2014 and extends the debt through February 7, 2014.
Let’s use this Quiet Period to review the status of Roth in-plan conversions and whether now is a good time for employers to add this provision to their 401(k) plans.
Under prior law, participants could not transfer amounts from traditional 401(k) accounts to Roth accounts in the same plan until they attained age 59 ½ or left their employer. The new law allows participants to make the transfer from a traditional 401(k) account to a Roth retirement plan account at any time.
Over the last several months, infrastructure has been put in place to handle Roth in-plan conversions for many 401(k) plans.
- Attorneys and document providers have drafted amendments to add the Roth conversion.
- 401(k) recordkeepers have enhanced their systems to separately account for Roth conversions.
- Payroll systems have been modified to separately account for Roth conversions.
But there has not been a rush to make the change, and here’s why.
There are a number of unanswered questions about how the new in-plan Roth conversions will work, guidance for which has not yet provided by the Internal Revenue Service.
In the meantime, employers are being understandably cautious and deferring a decision until then.
Academics would call this cautiousness an application of the Law of Unintended Consequences. That is, outcomes that are not intended by a particular action, e.g., employees suffering adverse tax consequences.
In ERISA terms, we call it being prudent.