401(k) Plan Roth Conversions

Prepared October 14, 2010

On September 27, 2010 President Obama signed into law the Small Business Jobs Act of 2010 (the “Act”). The Act includes an opportunity for a plan sponsor to offer a Roth conversion option to plan participants under a 401(k) plan. The current law allows participants to contribute to a plan on an after-tax basis to a separate designated Roth account under a 401(k) plan (subject to certain limitations) and participants who are eligible to receive a distribution to elect to roll over the qualified distribution to a Roth IRA.

The Act provides an employee greater flexibility to elect to convert some or all of certain amounts that were contributed to a plan on a pre-tax basis into an after-tax Roth account inside the plan, which is  called an “in-plan” Roth conversion. The Act allows 401(k) plans to provide such a provision effective after September 27, 2010, provided that the plan is amended to provide for the in-plan conversions by December 31, 2010, unless the Internal Revenue Service provides for additional time. In order for participants that are actively employed by the plan sponsor (other than participants who have reached normal retirement age) under a plan to take advantage of the Roth conversion provision, the plan document must provide for in-service distributions.

Unfortunately, plan sponsors have been given little time to weigh the pros and cons, as well as well the steps needed, to implement the in-plan Roth provision to their plans. We recommend that plan participants consider the potential changes to your plan and if you have any questions, or would like to schedule an appointment to discuss this option and how it may benefit you, then please feel free to contact us.