SPARK Institute Urges Caution on In-Plan Roths

The SPARK Institute, a retirement services trade group, is advising plan sponsors to not act hastily when deciding whether to offer in-plan Roth conversions as a result of a recently passed law.

A news release from the SPARK Institute said the group was concerned that sponsors would react to a “sense of urgency” regarding the Roth conversion option to put it in place quickly to allow participants to take advantage of the two-year special tax treatment for 2010 conversions. (see In-Plan Roth Conversions Present Challenges). 

“We urge plan sponsors to carefully consider the potential risks that Roth conversions may create for the plan as a whole, and not base their decisions solely on the potential benefits to individual highly compensated employees who may be personally interested in the 2010 special tax treatment,” declared Larry H. Goldbrum, General Counsel, in a news release about the group’s recently released Compliance Alert on the Roth issue.

According to the alert, the U.S. Treasury Department needs to provide guidance on unresolved issues before plan sponsors and recordkeepers can decide what to do. The unresolved issues are:

  • The new law does not specify whether the distribution portion of the conversion is subject to the mandatory 20% withholding requirement on distributions.
  • It is unclear whether a plan that does not currently allow Roth accounts can be amended to add them and the in-plan conversion feature in the remedial amendment period that is applicable for plans that already allow Roth accounts.
  • The new law does not indicate how and if plan conversion amounts must be segregated from regular Roth deferrals for recordkeeping purposes.  

Goldbrum said other issues that sponsors should consider include:

  • An in-plan Roth conversion is irrevocable and cannot be recharacterized after it is made, in contrast to a Roth IRA, which can be revoked before the participant’s tax filing deadline.
  • Roth IRA rollovers remain a viable option for otherwise eligible participants who want to take advantage of the special two-year tax treatment in 2010 and involve significantly less risk for the plan and plan sponsor at this point.

The SPARK Institute Roth alert is here.