In-plan 401k Roth conversions under age 59.5
Our plan administrator said that even with the new law, we can’t amend a 401k plan to allow for in-plan conversions to Roths. He said the 59.5 age requirement would have to apply still. (Most of our employees are under age 59.5)
I don’t believe this at all, since the money on a Roth conversion will be staying within the same plan. My thought is to go ahead with a plan amendment that allows for in-service withdrawals for all ages, provided they are for the purpose of a Roth conversion within the plan.
Has anyone else encountered this? I showed the administrator the November issue of Ed Slott’s newsletter, which so far is the best explanation I have seen of the new rules, but he still isn’t budging.
Thank you
Permalink Submitted by Alan Spross on Thu, 2010-11-18 20:32
SInce this is the employer’s prerogative, his response should probably be interpreted as “won’t” rather than “can’t”. That said, there are enough unresolved issues surrounding these in plan conversions that I can understand why an employer would want to wait until they were fully resolved before amending the plan. Serious time pressures exist because the ability to defer the income on these in plan conversions to 2011 and 2012 expires on 12/31/2010.
Permalink Submitted by Roger Pine on Thu, 2010-11-18 20:59
Thanks. I should have clarified that in this case I am actually the employer. Most of the employees and I want to be able to convert to Roths this year to use the split year tax treatment.
The plan administrator in this case is a third party to whom we have outsourced the admin. He is advising against any changes, but our board of directors has already approved the plan amendment.
I will report back to the forum if everything blows up in my face. In the meantime, if anyone else is working to amend their 401k plans, I would appreciate hearing how you go about it.
Permalink Submitted by Alan Spross on Fri, 2010-11-19 04:19
There are several issues that relate to your question. The following article from the American Benefits Council addresses most of them:
http://www.americanbenefitscouncil.org/documents/roth_summary-dh092010.pdf
Permalink Submitted by Martin Helmer on Mon, 2010-11-29 19:56
Notice 2010-84, 2010-51 IRB 1 showed up on Lexis-Nexis today. It has a Q and A treatment of ‘in-plan’ Roth conversions for 401(k) and 403(b) plans. It does state you can’t convert amounts attributable to employee elective deferrals if you’re under age 59 1/2. Amounts that are not attributable to elective deferrals can be converted and taken into taxable income for 2011 and 2012.
Permalink Submitted by Roger Pine on Mon, 2010-11-29 20:18
Very interesting. Thank you. It sounds like the plan amendment will have to be very specific about distributions for Roth conversions. I suppose the safest way to go would be to limit any in-plan Roth conversions to the employer safe harbor contributions only.