401k Requirements

<div class="Section1"><br /> <br /> The 2019 Tax Certainty and Disaster Relief Act extended the rules governing qualified disaster distributions from retirement accounts, discussed below for victims of disasters that occurred in 2018 through 60 days after enactment of the bill (December 20, 2019). The distribution itself must be made within 180 days after enactment of the law to qualify. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>. <em><em>See also</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of how the CARES Act expanded the retirement plan distribution rules for 2020 in response to the COVID-19 pandemic.<br /> <br /> The 2017 tax reform legislation,<a href="#_ftn1" name="_ftnref1">¹</a> the 2017 Disaster Tax Relief and Airport and Airway Extension Act,<a href="#_ftn2" name="_ftnref2">²</a> and the Bipartisan Budget Act of 2018,<a href="#_ftn3" name="_ftnref3">³</a> include special tax relief for taxpayers affected by certain presidentially declared disasters that occurred in 2016 and 2017.<br /> <br /> A 2016 qualified disaster is a major disaster that was declared in 2016 by the president. A 2016 qualified disaster distribution is any distribution received from an eligible retirement plan in 2016 or 2017 if the recipient&rsquo;s main home was located in a 2016 qualified disaster area and the recipient sustained an economic loss from the disaster.<br /> <br /> A 2017 qualified disaster is limited to Hurricane Harvey and Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires. To be a 2017 qualified disaster distribution, the following requirements must be met:<br /> <br /> 1. The distribution was made:<br /> <p style="padding-left: 40px;">a. After August 22, 2017, and before January 1, 2019, for Hurricane Harvey or Tropical Storm Harvey (both referred to as Hurricane Harvey);</p><br /> <p style="padding-left: 40px;">b. After September 3, 2017, and before January 1, 2019, for Hurricane Irma;</p><br /> <p style="padding-left: 40px;">c. After September 15, 2017, and before January 1, 2019, for Hurricane Maria; or</p><br /> <p style="padding-left: 40px;">d. After October 7, 2017, and before January 1, 2019, for California<br /> wildfires.</p><br /> 2. The recipient&rsquo;s main home was located in a disaster area listed below on the date or any date in the period shown for that area.<br /> <p style="padding-left: 40px;">a. August 23, 2017, for the Hurricane Harvey disaster area.</p><br /> <p style="padding-left: 40px;">b. September 4, 2017, for the Hurricane Irma disaster area.</p><br /> <p style="padding-left: 40px;">c. September 16, 2017, for the Hurricane Maria disaster area.</p><br /> <p style="padding-left: 40px;">d. October 8, 2017 to December 31, 2017, for the California wildfire disaster area.</p><br /> 3. The recipient sustained an economic loss because of Hurricane Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires<br /> <br /> None of the Acts define economic loss. Examples of economic loss include loss, damage, or destruction of real or personal property; loss related to displacement from a home; and loss of livelihood due to temporary or permanent layoff.<a href="#_ftn4" name="_ftnref4">⁴</a> There is no requirement that the amount of the qualified disaster distribution relate to the amount of the taxpayer&rsquo;s economic loss from the disaster or be made on account of the disaster.<br /> <br /> The Acts provide special rules for distributions from retirement accounts (qualified plans, 403(a)s, 403(b)s, governmental 457(b)s, and traditional, SEP, SIMPLE, and Roth IRAs). Distributions from retirement accounts made because of a qualified disaster are exempt from the 10 percent early distribution penalty (or 25 percent early distribution penalty for certain SIMPLE IRA distributions) if the penalty would otherwise be imposed under IRC<br /> Section 72(t). Qualified disaster distributions are treated as meeting the applicable plan&rsquo;s distribution requirements. The amount that may be treated as a qualified disaster area distribution is limited to $100,000 (the amount for any given year must be reduced by the amounts treated as 2016 disaster area distributions in prior years).<br /> <br /> If a taxpayer is affected by multiple qualifying disasters, the $100,000 limit is applied separately to each disaster distribution. Taxpayers may recognize income attributable to a qualified disaster distribution over a three-year period beginning with the year the qualified disaster distribution was made (unless an election to the contrary is made).<br /> <br /> In addition, taxpayers are also permitted a three-year period from the day after the distribution is received to make a repayment of qualified disaster distributions that is eligible for tax-free rollover treatment to an eligible retirement plan or made on account of a hardship. These repayments may be made at once or via a series of payments and will essentially be treated as though they were rollovers made within the 60-day window. A repayment to an IRA is not considered a rollover for purposes of the one-rollover-per year limitation for IRAs. The following types of distributions cannot be repaid:<br /> <ul><br /> <li>Qualified disaster distributions received as a beneficiary other than as a surviving spouse</li><br /> <li>Required minimum distributions</li><br /> <li>Periodic payments other than from an IRA that are for 10 years or more, the recipient&rsquo;s life or life expectancy or the joint lives or life expectancies of the recipient and their beneficiary.</li><br /> </ul><br /> Plans that make such a distribution also are protected against potential disqualification. Plans that permit qualified 2016 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2018. Plans that permit qualified 2017 disaster distributions must be amended by the last day of the plan year beginning on or after January 1, 2019.<br /> <br /> Taxpayers who received certain distributions from retirement plans to buy or construct a principal residence but did not buy or construct the residence because of Hurricane or Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, or the California wildfires had the opportunity to recontribute the distributions to an eligible retirement plan. The distributions had to be repaid before March 1, 2018 for repayments as a result of a hurricane or July 1, 2018 for repayments due to the California wildfires. A distribution that was not repaid before the applicable date may be taxable for 2017 and subject to the 10 percent additional tax on early distributions (or the 25 percent additional tax on certain SIMPLE IRA distributions).<br /> <br /> Individuals affected by a qualified disaster (as extended by the 2019 law) qualify for relaxed rules on loans from qualified plans. The plan administrator may increase the regular $50,000 limit on plan loans to $100,000 and the 50 percent of vested benefit limit to 100 percent. For individuals affected by a hurricane, the loan must have been made between September 29, 2017 and December 31, 2018. For someone affected by the California wildfires, the loan must have been made during the period beginning February 9, 2018 and ending on December 31, 2018. In addition, loan payments due during a specified period ending on December 31, 2018 may be suspended for one year by the plan administrator. The period begins on:<br /> <ul><br /> <li>August 23, 2017 if the recipient&rsquo;s home was located in the Hurricane Harvey disaster area</li><br /> <li>September 4, 2017 if the recipient&rsquo;s home was located in the Hurricane Irma disaster area</li><br /> <li>September 16, 2017 if the recipient&rsquo;s home was located in the Hurricane Maria disaster area; or</li><br /> <li>October 8, 2017 if the recipient&rsquo;s home was located in the California wildfire disaster area.</li><br /> </ul><br /> Casualty losses associated with a qualified 2016 or 2017 disaster are deductible regardless of whether total losses exceed 10 percent of the taxpayer&rsquo;s adjusted gross income (AGI), so long as the loss exceeds $500 per casualty. Taxpayers who do not itemize their deductions may increase their standard deduction by the net qualified disaster loss.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Section 11028, 2017 Tax Act, P.L. 115-97.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Title V, Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Subdivision 2, Title I, Bipartisan Budget Act of 2018, P.L. 115-123.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; 2017 IRS Publication 976, Disaster Relief.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For a designated Roth account, the plan must maintain separate accounts and recordkeeping for each employee’s designated Roth contributions and any earnings that are allocated to the contributions.<a href="#_ftn1" name="_ftnref1">¹</a> The separate accounting requirement is violated by “any transaction or accounting methodology involving an employee’s designated Roth account and any other accounts under the plan or plans of an employer that has the effect of directly or indirectly transferring value from another account into the designated Roth account.” A transaction that merely exchanges investments between accounts at fair market value will not violate the separate accounting requirement.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 402A(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.402A-1, A-13(a).<br /> <br /> </div>

<div class="Section1"><br /> <br /> The withholding requirements of IRC Section 3405 do not apply to otherwise nondistributable amounts that are rolled over from a traditional 401(k) into a Roth 401(k) because such a rollover must be accomplished through a direct rollover.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Further, because a nondistributable rollover cannot, by definition, be distributed to the taxpayer, a taxpayer is not permitted to voluntarily elect that a portion of the distribution be subject to withholding for purposes of meeting the taxpayer’s tax obligations with respect to the rollover. As a result, IRS guidance specifically advises that a taxpayer who elects to roll 401(k) funds into a Roth 401(k) may wish to increase withholding or make estimated payments in order to avoid an underpayment penalty.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Notice 2013-74, Q&amp;A-4, 2013-52 IRB 819.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 3402(p); Notice 2013-74, Q&amp;A-4, 2013-52 IRB 819.<br /> <br /> </div>

<div class="Section1"><br /> <br /> A “fiduciary advisor” for purposes of this provision is a person who provides investment advice to the participant or beneficiary and is one of the following:<br /> <p style="padding-left: 40px;">(1)  a Registered Investment Advisor (“RIA”) under the Investment Advisers Act of 1940 or state law in which the fiduciary maintains its principal office and place of business;</p><br /> <p style="padding-left: 40px;">(2)  a bank or similar financial institution, but only if the advice is provided through a trust department that is subject to periodic examination and review by federal or state banking authorities;</p><br /> <p style="padding-left: 40px;">(3)  an insurance company qualified to do business under the laws of a state;</p><br /> <p style="padding-left: 40px;">4)  a person registered as a broker or dealer under the Securities Exchange Act of 1934;</p><br /> <p style="padding-left: 40px;">(5)  an affiliate of any of the persons described in (1) through (4); or</p><br /> <p style="padding-left: 40px;">(6)  an employee, agent, or registered representative of a person described in (1) through (5) who satisfies the requirements of applicable insurance, banking, and securities laws relating to the provision of the advice.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 4975(f)(8)(J)(i); DOL Reg. § 2550.408g-1(c)(2)(i).<br /> <br /> </div>

<div class="Section1"><br /> <br /> A Roth contribution is deemed to be made on the first day of the first taxable year for which the employee first made any designated Roth contributions. Thus, for a calendar year plan, all contributions in the first year would be deemed made on January 1 of that year. Starting with that date, the five-year period ends at the end of the fifth consecutive taxable year following that date. The beginning of the five-year period for a designated Roth account does not change even if the employee receives a distribution of the entire account during the five-year holding period and subsequently makes additional designated Roth contributions under the plan.<br /> <br /> If an employee makes deferrals to designated Roth accounts under more than one plan, the employee will have two or more separate five-year periods of participation that are calculated independently of one another unless the employee makes a direct rollover of a Roth distribution from one plan to another plan.<a href="#_ftn1" name="_ftnref1">¹</a> If a direct rollover occurs, the five-year holding period for the receiving plan is deemed to begin on the earlier of beginning of the five-year holding period for the distributing plan or the beginning of the five-year holding period for the receiving plan. This calculation differs from the five-year period calculation under a Roth IRA in which the five year period starts with the date a Roth contribution was made to any Roth IRA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>).<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> A client planning to make deferrals to a designated Roth account for the next year should begin deferrals in the current year. This will begin the five-year period one year earlier, so qualified distributions can be made one year earlier.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect; 1.402A-1, A-4.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. Although the American Taxpayer Relief Act of 2012 expanded the rules to allow rollovers from traditional 401(k) accounts to Roth 401(k) accounts of otherwise nondistributable amounts, the IRS has issued guidance providing that distribution restrictions will still apply after such amounts are rolled over.<br /> <br /> Any amount that is rolled over from a traditional 401(k) to a Roth 401(k) remains subject to the same distribution restrictions that applied to the amounts before the rollover.<a href="#_ftn1" name="_ftnref1">¹</a> As a result, if an individual makes a rollover from a traditional 401(k) to a Roth 401(k) before reaching age 59½, for example, the rolled over amounts cannot be withdrawn from the Roth 401(k) on a penalty-free basis unless one of the other events described in IRC Section 401(k)(2)(B) has occurred (i.e., unless he or she reaches age 59½ or there has been a separation from service, death or disability).<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Notice 2013-74, 2013-52 IRB 819.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes. A plan that adopts an amendment permitting in-plan rollovers from traditional 401(k) accounts to Roth 401(k) accounts can, subject to otherwise applicable nondiscrimination requirements, restrict the types of contributions that can be rolled over. Further, the plan amendment can limit the frequency of these rollovers.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> For example, otherwise nondistributable amounts may be permissibly rolled over, it is up to the plan itself to determine whether it will allow these rollovers. For administrative convenience, a plan may provide that it will only permit rollovers of otherwise distributable amounts or that nondistributable amounts can only be rolled over at certain intervals.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Notice 2013-74, Q&amp;A-6, 2013-52 IRB 819.<br /> <br /> </div>

<div class="Section1"><br /> <br /> <em><em>Editor&rsquo;s Note</em></em>: Under the SECURE Act 2.0, employees may elect to have employer matching or non-elective contributions made on a Roth basis if the plan offers a Roth option starting with the 2023 tax year.&nbsp; The IRS has clarified that participants must be given the opportunity to make a Roth election at least once per year (presumably, that election could cover all employer-matching contributions made throughout the year).&nbsp; The participant must be fully vested to make the Roth election (only allowing fully vested participants to elect Roth matching contributions will not be treated as a discriminatory plan feature).&nbsp; The plan is still entitled to have a vesting schedule.&nbsp; Contributions are subject to income tax in the year of contribution but are not subject to employment taxes.&nbsp; Contributions are reported as in-plan rollovers in Form 1099-R.&nbsp; A plan may also be permitted to allow only employer Roth contributions without also allowing employee Roth deferrals.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A Roth 401(k) feature combines certain advantages of the Roth IRA with the convenience of 401(k) plan elective deferral-style contributions. The IRC states that if a qualified plan trust or a Section 403(b) annuity includes a qualified Roth contribution program, contributions to it that the employee designates to the Roth account, although not being excluded from the employee&rsquo;s taxable income, will be treated as an elective deferral for plan qualification purposes.<a href="#_ftn2" name="_ftnref2">²</a> A qualified plan or Section 403(b) plan will not be treated as failing to meet any qualification requirement merely on account of including a qualified Roth contribution program.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A qualified Roth contribution program means a program under which an employee may elect to make designated Roth contributions in lieu of all or a portion of elective deferrals that the employee is otherwise eligible to make.<a href="#_ftn4" name="_ftnref4">⁴</a> For this purpose, a designated Roth contribution is any elective deferral that would otherwise be excludable from the gross income of the employee, but that the employee designates as not being excludable.<a href="#_ftn5" name="_ftnref5">⁵</a> Final regulations set forth the following requirements for designated Roth contributions:<br /> <p style="padding-left: 40px;">(1)&nbsp; The contribution must be designated irrevocably by the employee at the time of the cash or deferred election as a designated Roth contribution that is being made in lieu of all or a portion of the pre-tax elective contributions the employee is otherwise eligible to make under the plan.</p><br /> <p style="padding-left: 40px;">(2)&nbsp; The contribution must be treated by the employer as includable in the employee&rsquo;s gross income at the time the employee would have received the amount in cash, if the employee had not made the cash or deferred election (i.e., it must be treated as wages subject to applicable withholding requirements).</p><br /> <p style="padding-left: 40px;">(3)&nbsp; The contribution must be maintained by the plan in a separate account, as provided under additional requirements set forth below.<a href="#_ftn6" name="_ftnref6">⁶</a></p><br /> A plan with a Roth contribution feature must provide for separate accounts for the designated Roth contributions of each employee and any earnings allocable to the account.<a href="#_ftn7" name="_ftnref7">⁷</a> Gains, losses, and other credits and charges associated with the Roth accounts must be separately allocated on a reasonable and consistent basis to the designated Roth account and other accounts under the plan. Forfeitures of any accounts may not be reallocated to the designated Roth account. No contributions other than designated Roth contributions and rollover Roth contributions (as described below) may be allocated to the Roth account. The separate accounting requirement applies from the time the designated Roth contribution is made until the designated Roth contribution account is completely distributed.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The maximum amount an employee may claim as a designated Roth contribution is limited to the maximum amount of elective deferrals permitted for the tax year, reduced by the aggregate amount of elective deferrals for the tax year for which no designation is made.<a href="#_ftn9" name="_ftnref9">⁹</a> Only one limit can be split between the Roth and salary deferrals of the employee each calendar year.<br /> <br /> Designated Roth contributions generally must satisfy the rules applicable to elective deferral contributions. Thus, for example, the nonforfeitability requirements and distribution limitations of Treasury Regulation Sections 1.401(k)-1(c) and (d) must be satisfied for Roth contributions. Designated Roth contributions are treated as elective deferral contributions for purposes of the Actual Deferral Percentage (&ldquo;ADP&rdquo;) test.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Beginning in 2024,&nbsp; designated Roth accounts are no longer subject to the minimum distribution requirements of IRC Section 401(a)(9) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3891">3891</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3909">3909</a>).<a href="#_ftn11" name="_ftnref11">¹¹</a> Roth 401(k)s were subject to the RMD rules in 2023, so first-time RMDs for 2023 that were due by April 1, 2024 were still required.&nbsp; Funds in a Roth IRA are also not subject to the lifetime minimum distribution requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3686">3686</a>).<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Roth IRAs have never been subject to minimum distribution requirements.&nbsp; That means when a Roth IRA is inherited, the beneficiary never has to worry about annual RMDs--because the original owner, by definition, had no required beginning date--so couldn't have died after that date.&nbsp; While Roth distributions are not taxable on distribution, the new rule gives beneficiaries of inherited accounts freedom to empty the account as they choose within the ten-year distribution window.&nbsp; It also gives living taxpayers the option of allowing the funds to grow tax-deferred indefinitely.<br /> <br /> <hr><br /> <br /> A payment or distribution otherwise allowable from a designated Roth account may be rolled over to another designated Roth account of the individual from whose account the payment or distribution was made or to a Roth IRA of the individual.<a href="#_ftn12" name="_ftnref12">¹²</a> Rollover contributions to a designated Roth account under this provision are not taken into account for purposes of the limit on designated Roth contributions.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> The IRC states that any qualified distribution from a designated Roth account is excluded from gross income.<a href="#_ftn14" name="_ftnref14">¹⁴</a> A qualified distribution for this purpose is defined in the same manner as for Roth IRAs except that the provision for &ldquo;qualified special purpose distributions&rdquo; is disregarded ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>).<a href="#_ftn15" name="_ftnref15">¹⁵</a> The term qualified distribution does not include distributions of excess deferrals (amounts in excess of the IRC Section 402(g) limit) or excess contributions (under IRC Section 401(k)(8)), or any income on them.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> <em><em>Nonexclusion period.</em></em> A payment or distribution from a designated Roth account will not be treated as a qualified distribution if it is made within the five-year nonexclusion period. This period begins with the earlier of (1) the first taxable year for which the individual made a designated Roth contribution to any designated Roth account established for that individual under the same retirement plan, or (2) if a rollover contribution was made to the designated Roth account from another designated Roth account previously established for the individual under another retirement plan, the first taxable year for which the individual made a designated Roth contribution to the previously established account.<a href="#_ftn17" name="_ftnref17">¹⁷</a><br /> <br /> The IRC states that notwithstanding IRC Section 72, if any excess deferral attributable to a designated Roth contribution is not distributed on or before the first April 15 after the close of the taxable year in which the excess deferral was made, the excess deferral will not be treated as investment in the contract and will be included in gross income for the taxable year in which such excess is distributed.<a href="#_ftn18" name="_ftnref18">¹⁸</a> Furthermore, it adds that &ldquo;Section 72 shall be applied separately with respect to distributions and payments from a designated Roth account and other distributions and payments from the plan.&rdquo;<a href="#_ftn19" name="_ftnref19">¹⁹</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Even though designated Roth contributions are not excluded from income when contributed, they are treated as elective deferrals for purposes of IRC Section 402(g). Thus, to the extent total elective deferrals for the year exceed the 402(g) limit for the year, the excess amount can be distributed by April 15 of the year following the year of the excess without adverse tax consequences. However, if the excess deferrals are not distributed by that time, any distribution attributable to an excess deferral that is a designated Roth contribution is includible in gross income (with no exclusion from income for amounts attributable to basis under Section 72) and is not eligible for rollover. If there are any excess deferrals that are designated Roth contributions that are not corrected prior to April 15 of the year following the excess, the first amounts distributed from the designated Roth account are treated as distributions of excess deferrals and earnings until the full amount of those excess deferrals (and attributable earnings) are distributed.<a href="#_ftn20" name="_ftnref20">²⁰</a><br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>&nbsp; Notice 2024-02.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; As defined in IRC &sect; 402(g).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&sect; 402A(a), 402A(e)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 402A(b)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect; 402A(c)(1).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(f)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect; 402A(b)(2).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(f)(2).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IRC &sect; 402A(c)(2).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(f)(3).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(f)(3).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; IRC &sect; 402A(c)(3).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp; IRC &sect; 402(A(c)(3)(B).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp; IRC &sect; 402A(d)(1).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp; IRC &sect; 402A(d)(2)(A). <em><em>See</em></em> IRC &sect; 408A(d)(2)(A)(iv).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp; IRC &sect; 402A(d)(2)(C).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp; IRC &sect; 402A(d)(2)(B).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp; IRC &sect; 402A(d)(3).<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp; IRC &sect;&sect; 402A(d)(3), 402A(d)(4).<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp; TD 9324, 2007-2 IRB (May 29, 2007).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A nonqualified distribution from a designated Roth account generally is partially nontaxable. The portion of the distribution that constitutes the employee contribution is not taxable, and the portion that relates to earnings on those contributions is taxable.<a href="#_ftn1" name="_ftnref1">¹</a> A nonqualified distribution may be rolled over to a Roth IRA. The funds in a designated Roth account are not subject to the ordering rules that determine the tax treatment of Roth IRA distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3673">3673</a>) unless they are rolled over to a Roth IRA.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The preamble to the proposed regulations illustrated the pro rata treatment of nonqualified distributions as follows: If a nonqualified distribution of $5,000 is made from an employee&rsquo;s designated Roth account when the account consists of $9,400 of designated Roth contributions and $600 of earnings, the distribution consists of $4,700 of designated Roth contributions (that are not includible in the employee&rsquo;s gross income) and $300 of earnings (that are includible in the employee&rsquo;s gross income).<br /> <br /> <em>Amounts not treated as qualified.</em> Certain amounts that are not eligible rollover distributions never can be treated as qualified distributions, and always will be currently includible in income. These include corrective distributions of excess deferrals, excess contributions and attributable income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>), deemed distributions resulting from violations of the plan loan requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3954">3954</a>), and the cost of current life insurance protection ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect; 1.402A-1, A-3; IRC &sect; 72(e)(8).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.408A-10, A-1.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&sect; 1.402(g)-1(e)(8)(iv), 1.402A-1, A-2(c), 1.402A-1, A-11.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A rollover of a designated Roth account distribution that is not includable in income may be made only to another designated Roth account of the individual from whose account the payment or distribution was made or to a Roth IRA of the individual either through a 60-day rollover or a direct rollover. A plan receiving a designated Roth account rollover must agree to separately account for the amount that is not includable in income. Furthermore, if such a rollover is made to another plan, it must be made as a direct rollover to assure that there is proper accounting in the recipient plan. In other words, a rollover to a plan is not available if the distribution has been made directly to the employee. In that case, however, an employee would have the option of rolling over the distribution to a Roth IRA within 60 days.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If a rollover is made from a designated Roth account under another plan, the five-year period for the receiving plan begins on the first day that the employee made designated Roth contributions to the other plan, if earlier.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> If a rollover is made from a designated Roth account to a Roth IRA, the period that the rolled over funds were in the designated Roth account does not count toward the five taxable year period for determining qualified distributions from the Roth IRA. If the Roth IRA was established in an earlier year, the five-year period for determining qualified distributions from the Roth IRA applies to distributions of rolled over amounts.<a href="#_ftn3" name="_ftnref3">³</a> Furthermore, the entire amount of any qualified distribution rolled over to a Roth IRA is treated as basis in the Roth IRA. As a result, a subsequent distribution from the Roth IRA of that amount would not be includable in the owner’s gross income.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> A client who does not have a Roth IRA and anticipates rolling over an amount from a designated Roth account to a Roth IRA should consider establishing a Roth IRA before the year the rollover is anticipated. This will start the five-year holding period.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 402A(c)(3); Treas. Reg. § 1.402A-1, A-5.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.402A-1, A-4(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 1.408A-10, A-4.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  Treas. Reg. § 1.408A-10, A-3(a).<br /> <br /> </div>