These frequently asked questions and answers provide general information and should not be cited as any type of legal authority. They provide the user with information responsive to general inquiries. Because these answers do not apply to every situation, yours may require additional research. We based our answers on the final regulations, Designated Roth Contributions to Cash or Deferred Arrangements Under Section 401(k) released January 3, 2006, and final regulations, Designated Roth Accounts Under Section 402A released April 30, 2007.
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General Questions on Designated Roth Accounts in Retirement Plans
- What is a Roth 401(k) or Roth 403(b)? Is it a new type of plan?
- When can employees start making designated Roth contributions to a designated Roth account?
What is a Roth 401(k) or Roth 403(b)? Is it a new type of plan?
No, it is not a new type of plan. Designated Roth contributions are a new type of contribution that new or existing 401(k) or 403(b) plans can accept. The Economic Growth and Tax Relief Reconciliation Act of 2001 added this feature, effective for years beginning on or after January 1, 2006. If a plan adopts this feature, employees can designate some or all of their elective contributions (also referred to as elective deferrals) as designated Roth contributions (which are included in gross income), rather than traditional, pre-tax elective contributions. Starting in 2006, elective contributions can be of two different types: traditional, pre-tax elective contributions and designated Roth contributions.
When can employees start making designated Roth contributions to a designated Roth account?
Legislation permits employees to make designated Roth contributions to 401(k) or 403(b) plans after December 31, 2005; however, the plan sponsor must amend the plan to add this feature by the end of the plan year in which the designated Roth contributions are first effective.
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Designated Roth Contributions
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What is a designated Roth contribution?
A designated Roth contribution is a type of elective deferral that an employee can make to a §401(k) or 403(b) plan.
With a designated Roth contribution, the employee irrevocably designates the deferral as an after-tax contribution that the employer must deposit into a designated Roth account. The employer includes the amount of the designated Roth contribution deferral in the employee’s gross income at the time the employee would have otherwise received the amount in cash if the employee had not made the election. It is subject to all applicable wage-withholding requirements. The law does not allow designated Roth contributions in SARSEP or SIMPLE IRA plans.
Can employees make both pre-tax elective and designated Roth contributions in the same year?
Yes, employees can contribute to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion they choose.
Is there a limit on how much an employee may contribute to his or her designated Roth account?
Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under Code §402(g)). The limit is $16,500 for 2009 plus an additional $5,500 in catch-up contributions in 2009 if the employee is age 50 or older at the end of the year. These limits may be increased in later year to reflect cost-of-living adjustments.
Can an employee make age-50 catch-up contributions as designated Roth contributions to his or her designated Roth account?
Yes, provided the employee is age 50 or older by the end of the year and the plan permits such contributions.
Can an individual make the maximum contributions, including catch-up contributions, to both a designated Roth 401(k) or 403(b) account and a Roth IRA in the same year?
Yes. An individual age 50 or older can make a contribution of up to $22,000 in 2009 to the 401(k) or 403(b) plan ($16,500 regular and $5,500 catch-up contributions) and $6,000 to a Roth IRA ($5,000 regular and $1,000 catch-up IRA contributions) for a total of $28,000 for 2009.
When must an employee be able to elect to make designated Roth contributions?
An employee must have an effective opportunity to make (or change) an election to make designated Roth contributions at least once during each plan year. The plan must state the rules governing the frequency of the elections. These rules must apply in the same manner to both pre-tax elective contributions and designated Roth contributions. An employee must make a valid designated Roth election, under the rules of the plan, before he or she can place any money in a designated Roth account.
Do the same income restrictions that apply to Roth IRAs apply to designated Roth contributions?
No, there are no limits on an employee’s income in determining if he or she can make designated Roth contributions. Of course, the employee has to have salary from which to make any 401(k) or 403(b) deferrals.
Can an employer match an employee's designated Roth contributions? Must the employer allocate the matching contributions to a designated Roth account?
Yes, the employer can make matching contributions on designated Roth contributions. However, the employer can only allocate an employee’s designated Roth contributions to designated Roth accounts. The employer must allocate any contributions to match designated Roth contributions into a pre-tax account, just like matching contributions on traditional, pre-tax elective contributions.
Can employers allocate plan forfeitures to designated Roth accounts?
Employers can only allocate designated Roth contributions and rollover contributions (and earnings on these contributions) to designated Roth accounts. The employer may not allocate forfeitures, matching or any other employer contributions to any designated Roth accounts.
Can an employee change his or her mind and have designated Roth contributions treated as pre-tax elective contributions?
No. An employee’s election to make certain deferrals as designated Roth contributions is irrevocable. Once the employee designates the contributions as Roth contributions, the employee cannot later change them to traditional, pre-tax elective contributions.
Can a plan offer only designated Roth contributions?
No, in order to provide for designated Roth contributions, a 401(k) or 403(b) plan must also offer traditional, pre-tax elective contributions.
Can a plan automatically enroll an employee into making designated Roth contributions if the employee fails to decline participation?
Yes, a plan that provides for a cash or deferred election can stipulate that unless the employee declines participation, the employer will automatically withhold elective deferrals from the employee’s pay. If the plan has both traditional, pre-tax elective contributions and designated Roth contributions, the plan must state how the employer will allocate an employee’s automatic contributions between the pre-tax elective contributions and designated Roth contributions.
Can an individual make a designated Roth contribution on his or her spouse's behalf if the spouse has no earned income, as permitted with a spousal IRA account?
No. Although an individual can contribute to a traditional or Roth IRA on behalf of his or her spouse based on the individual’s earned income, he or she cannot contribute to a Roth 401(k) or Roth 403(b) on behalf of his or her spouse.
If an individual's only participation in a retirement plan is through non-deductible designated Roth contributions to a designated Roth account, can the individual make a deductible IRA contribution regardless of the amount of income, or do the active participant rules apply?
An individual can contribute to a traditional IRA (up to the maximum IRA dollar limits) regardless of whether or not he or she is an active participant in a plan. However, when determining whether the individual can deduct a contribution to a traditional IRA, the active participant rules under Code §219 apply. An individual who makes designated Roth contributions to a designated Roth 401(k) or 403(b) account is an active participant. As such, the individual’s ability to deduct contributions made to a traditional IRA depends on his or her modified adjusted gross income.
If an employer offers designated Roth contributions to one participant in a 403(b) plan, must the employer offer them to all other participants in the plan?
Yes. Under the universal availability requirement of §403(b)(12), if any employee is given the opportunity to designate §403(b) elective deferrals as designated Roth contributions, then all employees must be given that right.
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Designated Roth Accounts
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What is a designated Roth account?
A designated Roth account is a separate account in a 401(k) or 403(b) plan to which an employer allocates an employee’s designated Roth contributions and their gains and losses. The employer must separately account for all contributions, gains and losses to this designated Roth account until this account balance is completely distributed.
Does an employer need to establish a new account under its 401(k) or 403(b) plan to receive an employee's designated Roth contributions?
Yes, the employer must establish a new separate account for each participant making designated Roth contributions and must keep the designated Roth contributions completely separate from the participant’s previous and current 401(k) or 403(b) traditional, pre-tax elective contributions.
Does "separate account" refer to the actual funding vehicle or does it refer to separate accounting within the plan's trust?
Under §402A, the “separate account” requirement can be satisfied by any means by which an employer can separately and accurately track a participant’s designated Roth contributions, along with corresponding gains and losses.
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Distributions from Designated Roth Accounts
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What is a qualified distribution from a designated Roth account?
A qualified distribution is generally a distribution that is made after a 5-taxable-year period of participation and is either:
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made on or after the date the employee attains age 59½ ,
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made after the employee’s death, or
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attributable to the employee’s being disabled.
If a distribution is made to an alternate payee or beneficiary, then the employee’s age, death or disability is used to determine whether the distribution is qualified. The only exception is when the alternate payee or surviving spouse rolls over the distribution to his or her own employer’s designated Roth account, in which case their own age, death or disability is used to determine whether the distribution is qualified.
A qualified distribution from a designated Roth account is not included in the employee’s gross income.
What is a 5-taxable-year period of participation? How is it calculated?
The 5-taxable-year period of participation begins on the first day of the employee’s taxable year for which the employee first made designated Roth contributions to the plan. It ends when five consecutive taxable years have passed. If the employee makes a direct rollover from a designated Roth account under another plan, the 5-taxable-year period for the employee in the recipient plan begins on the first day of the taxable year that the employee made designated Roth contributions to the other plan, if earlier.
When a reemployed veteran makes designated Roth contributions, they are treated as made in the taxable year with respect to which the contributions relate, as so designated by the reemployed veteran.
Certain contributions do not start the 5-taxable-year period of participation. For example, a year in which the only contributions consist of excess deferrals will not start the 5-taxable-year period of participation. Further, excess contributions that are distributed to prevent an ADP failure also do not begin the 5-taxable-year period of participation.
What types of distributions cannot be qualified distributions and must be included in gross income?
Employees cannot treat the following types of distributions from a designated Roth account as qualified distributions (or eligible rollover distributions) and must include any earnings paid out in gross income:
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Corrective distributions of elective deferrals in excess of the §415 limits (lesser of $46,000 (for 2008, $49,000 in 2009) or 100% of earnings)
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Corrective distributions of excess deferrals under §402(g) ($15,500 in 2008, $20,500 if age 50 or older; $16,500 in 2009, $22,000 if age 50 or older)
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Corrective distributions of excess contributions or excess aggregate contributions
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Deemed distributions under §72(p) (where the participant defaults on repayment of a loan from the plan).
What happens if an employee takes a distribution from his or her designated Roth account before the end of the 5-taxable-year period?
If the employee takes a distribution from his or her designated Roth account before the end of the 5-taxable-year period, it is a nonqualified distribution. The employee must include the income portion of the nonqualified distribution in gross income. However, the basis (or contributions) portion of the nonqualified distribution is not included in gross income. The basis portion of the distribution is determined by multiplying the amount of the nonqualified distribution by the ratio of designated Roth contributions to the total designated Roth account balance. For example, if a nonqualified distribution of $5,000 is made from an employee’s designated Roth account when the account consists of $9,400 of designated Roth contributions and $600 of income (earnings), the distribution consists of $4,700 of designated Roth contributions (that are not includible in the employee’s gross income) and $300 of earnings (that are includible in the employee’s gross income).
See Q&As regarding Rollovers of Designated Roth Contributions, below, for additional rules for rolling over both qualified and nonqualified distributions from designated Roth accounts.
Since an employee makes designated Roth contributions from after-tax income, can the employee make tax-free withdrawals from his or her designated Roth account at any time?
No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If a plan permits distributions from 401(k) or 403(b) accounts because of hardship, an employee may choose to receive a hardship distribution from his or her designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless the employee has had the designated Roth account for 5 years and is either disabled or over age 59 ½.
Is a distribution from a designated Roth account for reasons beyond a participant's control (e.g., plan termination or severance from employment) a qualified distribution from a designated Roth account even though it doesn't meet the criteria for a qualified distribution?
No, if the account has not been held for more than 5 years or if the distribution is not made after death, disability or age 59 ½, then the distribution is not a qualified distribution. However, the participant could roll the distribution over into a designated Roth account in another plan or into the participant’s Roth IRA. If to another designated Roth account, the transfer must be via a direct rollover.
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Rollovers of Designated Roth Contributions
- Can an employee roll over distributions from a designated Roth account to another employer's designated Roth account or into a Roth IRA?
- How is the 5-taxable-year period calculated when an employee rolls over a distribution from a designated Roth account in a 401(k) or 403(b) plan to a Roth IRA?
- Are there any examples to help explain the rollover rules?
Can an employee roll over distributions from a designated Roth account to another employer's designated Roth account or into a Roth IRA?
Yes. However, because a distribution from a designated Roth account consists of both pre-tax money (earnings on the Roth contributions) and basis (Roth contributions), it must be rolled over into a designated Roth account in another plan through a direct rollover. If the distribution is made directly to the employee and then rolled over within 60 days, the basis portion cannot be rolled over to another designated Roth account, but can be rolled over into a Roth IRA.
If only a portion of the distribution is rolled over, the rolled over portion is treated as consisting first of the amount of the distribution that is includible in gross income. Alternatively, the employee may roll over the taxable portion of the distribution to a 401(a) or 403 (b) plan’s designated Roth account within 60 days of receipt. However, the employee’s period of participation under the distributing plan is not carried over to the recipient plan for purposes of measuring the 5-taxable-year period under the recipient plan.
How is the 5-taxable-year period calculated when an employee rolls over a distribution from a designated Roth account in a 401(k) or 403(b) plan to a Roth IRA?
When an employee rolls over a distribution from a designated Roth account in a 401(k) or 403(b) plan to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count toward the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if that individual had contributed to any Roth IRA in a prior year, the 5-taxable-year period for determining qualified distributions from a Roth IRA is measured from the earlier contribution. So, if the earlier contribution was made more than 5 years ago and the employee is over 59 ½ a distribution of amounts attributable to a rollover contribution from a designated Roth account would be a qualified distribution from the Roth IRA.
Are there any examples to help explain the rollover rules?
Yes, the following examples from the regulations under §402A illustrate the rollover rules.
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Employee B receives a $14,000 eligible rollover distribution that is not a qualified distribution from B’s designated Roth account, consisting of $11,000 of investment in the contract and $3,000 of income. Within 60 days of receipt, Employee B rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of investment in the contract. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Employee B’s gross income.
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Employee C receives a $12,000 distribution, which is a qualified distribution that is attributable to the employee being disabled, from C’s designated Roth account. Immediately prior to the distribution, the account consisted of $21,850 of investment in the contract (i.e., designated Roth contributions) and $1,150 of income. For purposes of determining recovery of investment in the contract, the distribution is deemed to consist of $11,400 of investment in the contract [$12,000 × 21,850/(1,150 + 21,850)], and $600 of income [$12,000 × 1,150/(1,150 + 21,850)]. Immediately after the distribution, C’s designated Roth account consists of $10,450 of investment in the contract and $550 of income. This determination of the remaining investment in the contract will be needed if C subsequently is no longer disabled and takes a nonqualified distribution from the designated Roth account.
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Reporting & Recordkeeping Requirements for Designated Roth Accounts
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Who is responsible for keeping track of the designated Roth contributions and 5-taxable-year period?
The plan administrator is responsible for keeping track of the amount of designated Roth contributions made for each employee and the date of the first designated Roth contribution for calculating an employee’s 5-taxable-year period. In addition, the plan administrator of a plan directly rolling over a distribution would be required to provide the plan administrator of the recipient plan (i.e., the plan accepting the eligible rollover distribution) with a statement indicating either the first year of the 5-taxable-year period for the employee and the portion of such distribution attributable to basis or that the distribution is a qualified distribution.
Since a qualified distribution from a designated Roth account is not subject to taxation, must the distribution be reported?
Yes, a distribution from a designated Roth account must be reported on Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
For direct rollovers, the plan administrator is required to provide the plan administrator of the plan accepting an eligible rollover distribution, with a statement indicating either the first year of the 5-taxable-year period for the employee and the portion of such distribution attributable to basis, or, that the distribution is a qualified distribution.
For other distributions, the plan administrator must provide to the employee, upon request, the portion of the distribution attributable to basis or that the distribution is a qualified distribution. The statement is required to be provided within a reasonable period following the employee request, but in no event later than 30 days following the employee request.
Since designated Roth contributions are already included as part of wages, tips & other compensation on Form W-2, must designated Roth contributions also be identified on Form W-2?
Yes, contributions to a designated Roth account must be reported separately on Form W–2, Wage and Tax Statement.
Do employees have any recordkeeping or reporting obligations?
An employee has no reporting obligation with designated Roth contributions in a 401(k) or 403(b) plan. However, an employee rolling over a distribution from a designated Roth account to a Roth IRA should keep track of the amount rolled over in accordance with the instructions to Form 8606, Nondeductible IRAs.
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Miscellaneous
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Are an employee's designated Roth contributions included in the 401(k) plan annual nondiscrimination testing?
Yes, designated Roth contributions are treated the same as traditional, pre-tax elective contributions when performing annual nondiscrimination testing.
If an employee is required to take a corrective distribution from his or her 401(k) plan because the plan failed the ADP nondiscrimination test, can the employee take some or all of the corrective distribution from his or her designated Roth account?
Yes, a plan can provide that a highly compensated employee, as defined in Code §414(q), with both traditional, pre-tax elective contributions and designated Roth contributions during a year may elect to attribute excess contributions to pre-tax elective or designated Roth contributions. The plan does not have to provide this option and may provide for correction without permitting an HCE to make this election.
A distribution of excess contributions is not includible in gross income if it is a distribution of designated Roth contributions. However, the income allocable to a corrective distribution of excess contributions that are designated Roth contributions is includible in gross income in the same manner as income allocable to a corrective distribution of excess contributions that are pre-tax elective contributions. The final Roth 401(k) regulations also provide a similar rule under the correction methods that a plan may use if it fails to satisfy the actual contribution percentage test.
Are designated Roth 401(k) accounts included when determining whether a plan is top-heavy?
Yes, they are treated just like other elective deferral accounts and must be included when calculating the top-heavy ratio each year.
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Have a Question?
If I have questions concerning designated Roth accounts, where do I go for help?
For retirement plans technical and procedural questions:
Please call the TE/GE Customer Account Services at (877) 829-5500 (a toll-free number).
Or you may visit the EP Customer Account Services section of this web page.
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