Roth 401k Administrative Requirements

[roth401k]

Roth 401k Administrative Requirements

Roth 401(k) contributions have several features that require separate accounting, which may be a bit cumbersome for some administrators. Roth 401(k) contributions must be credited and debited to adesignated account and maintained for the employee from the time the first Roth 401(k) contributionis made until the time of distribution. This separate administration will allow plans to report whetherdistributions are includable or excludable from taxable income.

What Plan Sponsors Need to Know?

Step 1: Decide whether to add a qualified Roth contribution program. Whether a plan sponsor should add Roth 401(k) contributions depends upon the perceived value provided to the employees compared to the time and cost associated with implementing Roth 401(k) contributions.

Step 2: Determine the effective date. If a plan sponsor decides to add Roth 401(k) contributions, the plan sponsor must determine when employees can begin making after-tax Roth 401(k) contributions. Roth 401(k) contributions are not available until January 1, 2006, though they may be added any time thereafter.

Step 3: Amend the 401(k) plan document. If a plan sponsor adds Roth 401(k) contributions, plan sponsors will need to execute a formal plan amendment to implement this new feature.

Step 4: Tackle the administrative tasks. Plan sponsors and plan administrators will need to do the following:

--Decide how Roth 401(k) contributions will fit into the plan distribution hierarchy — whether distributions will be made first from traditional 401(k) contributions, from Roth 401(k) contributions, or as employees elect.

--Review the payroll system to determine whether the system is equipped to handle the different tax withholding and reporting for after-tax contributions.

--Review the plan recordkeeping system to determine whether the system can maintain a record of the different employee designations and add a separate subaccount to allocate gains, losses, and other credits and charges to the Roth 401(k) account.

--Update the plan’s employee communication tools, including the summary plan description and administrative forms, to provide employees with the information necessary to make an informed decision about whether to designate all or a portion of their elective deferral contributions as pre-tax or an after-tax Roth 401(k) contribution.



At first glance the Roth 401k or 403(b) plans seemed to hold little attraction for plan participants as a personal savings vehicle, and seemed to be a lot of hassle for sponsors and record keepers. However, because they allow participants to better customize their retirement savings based on individual circumstances, the Roth 401(k) and 403(b) both appear to be worth the effort for plan sponsors and employees. For plans that allow Roth elective deferrals, the question will be: traditional 401(k) elective deferral or Roth after-tax elective deferral?

Plan sponsors should consult with their attorney before deciding. The right decision for any individual will depend on a number of currently unknown factors, including our future tax system, future investment returns of the deferrals, inflation rate and future personal income and expenses.