Forum Discussion on Proposed Roth 401(k) Regulations

[roth401k]

Practitioner's Forum Discussion on Proposed Roth 401(k) Regulations

The following is the transcript of an informal discussion of employee benefit practitioners held in Washington, DC on March 17, 2005. The topic centers on recently issued IRS proposed regulations explaining Roth 401(k) accounts.

Discussion Participants:

Stuart M. Lewis, Buchanan Ingersoll, P.C. (including the law firm of Silverstein and Mullens)
Nicholas P. Damico, Law Offices of Nicholas Damico
Elizabeth E. Drigotas, Deloitte & Touche, LLP
Anne E. Moran, Steptoe & Johnson, LLP
Lisa Robinson, Investment Company Institute

Mr. Lewis: Recently, the IRS issued proposed regulations (REG-152354-04, 70 Fed. Reg. 10062 (3/2/05)) outlining rules which would allow employers to offer Roth IRA-like accounts under a §401(k) plan. Specifically, employers sponsoring 401(k) plans may offer participants the choice between making pre-tax elective deferrals to a "traditional" 401(k) account, or making nondeductible contributions to an account that would be treated like a Roth IRA. These Roth 401(k) accounts would be separately accounted for under the 401(k) plan, and distributions would be made tax-free, subject to certain requirements. Roth 401(k) accounts would be available for plan years beginning in 2006.

While the proposed regulations are rather short, the proposed rules may have a big impact on employers and the 401(k) industry. For example, arguably the most appealing attribute of a Roth 401(k) account is that participants are not subject to the income thresholds that are currently subject to Roth IRAs, thereby allowing highly compensated employees (HCEs) to make Roth IRA-like contributions. In addition, Roth 401(k) contributions would be treated as "elective deferrals" under a cash or deferred arrangement, and therefore, such contributions would be subject to the §402(g) limits (i.e., $15,000 in 2006), rather than subject to the applicable dollar amount for Roth IRAs (i.e., the maximum dollar amount is $4,000 in 2006, which is reduced based on compensation thresholds). An attribute that may not be so appealing, however, is the requirement to separately account for the Roth 401(k) contributions. This separate accounting requirement would add another layer of complexity and will surely add to new recordkeeping and compliance costs for employers. Do you anticipate that employers will add the Roth 401(k) ...................

Full Article Here:
http://www.bnatax.com/tm/insights_MayCPJ.htm


This commentary also will appear in the May 6, 2005, issue of the Tax Management Compensation Planning Journal. For more information, in the Tax Management Portfolios, see 355 T.M., IRAs, SEPs and SIMPLEs, and 358 T.M., Cash or Deferred Arrangements, and in Tax Practice Series, see ¶5510, Qualified Plans -- Overview, and ¶5610, IRAs.