Trade Groups Request Guidance on In-Plan Roth Conversions

The Investment Company Institute (ICI) and the American Benefits Council (ABC) have requested immediate guidance on section 2112 of the Small Business Jobs Act of 2010.

The act allows conversions of assets in defined contribution plans into Roth accounts within the plans. In a letter to The Treasury Department and Internal Revenue Service, the ABC said since the provision was effective upon enactment, “it has resulted in an immediate and urgent need for guidance necessary to implement this provision.” Both the ICI and ABC pointed out that participants are eager to transact conversions during 2010 because they are allowed to defer taxation until 2011 and 2012.  

ICI said the most pressing issues are: withholding, 1099-R reporting, recharacterization, the steps needed to complete an in-plan Roth conversion, plan amendment requirements, application of the five-year waiting period, and loans.  

Specifically, the groups are asking the IRS to clarify whether an in-plan Roth conversion is subject to the mandatory 20% federal tax withholding or whether, since it is similar to an eligible rollover distribution, no withholding is required. They also ask for clarification on whether 1099-R reporting is required and how to code the distribution on the 1099-R. ICI recommended in its letter that because of the short amount of time providers have to make programming changes, the distributions should be coded the same as for direct Roth rollovers (Code G).  

ICI also recommended that a plan should be able to complete an in-plan Roth conversion in a manner that will not result in the actual liquidation and reinvestment of the converted amount, as long as the plan’s records reflect the in-plan conversion.  

Also, due to the shortage of time, the groups asked that a remedial plan amendment period be provided in which to amend plans to permit Roth accounts and conversions.  

The ABC asked the IRS to confirm that outstanding loans of any participant may be converted even if the loan has been deemed distributed.  

Currently, Roth contributions to a plan are subject to a five-year holding period before they can be considered for qualified distributions made after age 59 ½, death or disability, or for a first-time home purchase. There is also a five-year period for determining whether the special early distribution tax rule applies. The groups asked for clarification on whether contributions into a Roth account and conversions into the account need to be tracked separately for purposes of these five year rules.   

The ICI letter is here 

The ABC letter is here 

Others have warned plan sponsors about the challenges of and still unanswered questions about in-plan Roth conversions (see In-Plan Roth Conversions Present Challenges and SPARK Institute Urges Caution on In-Plan Roths).