New Law Allows In-Plan Rollovers to 401(k) Roth Accounts

The Small Business Jobs Act of 2010 permits Plan Sponsors to amend their 401(k) Plan to allow participants to transfer an Eligible Rollover Distribution into their designated Roth account within the Plan.  The Eligible Rollover Distribution must be:
   1.  made after September 27, 2010;
   2.  from a non-designated Roth account in the same plan;
   3.  because of an event that triggers an Eligible Rollover Distribution from the Plan; and
   4.  otherwise meet the rollover requirements.

If a participant rolls over an Eligible Rollover Distribution into a designated Roth account, he or she must include any previously untaxed portion in gross income.   However, the rolled over amount is not subject to the 10% early withdrawal penalty tax.  For 2010 only, if a participant rolls over into a designated Roth account, he or she can include half of the taxable amount in 2011 gross income and half in 2012 gross income OR include the entire amount of the rollover in gross income for 2010.

If your client's plan document does not already allow Roth Deferrals, it would have to be amended to include that feature and the plan document would need to be amended to allow for the in-plan Roth conversion.  There are some administrative considerations to adding the Roth deferral option if you do not already have it in your plan such as being prepared to take after-tax salary deferrals from paychecks and submitting those as such to the recordkeeping vendor.  In addition, the distribution procedures will be affected.